The Chinese equity market has been on a streak recently, although it has experienced a huge pullback recently due to the over-leveraged market thanks to margin trading. The Chinese Central government announced the opening of margin accounts back in January 2015 but has suddenly placed strict limitations at the end of June 2015 to control the fall into the so-called bear market zone. Moreover, retail investors/traders own more than 80% of the whole equity market, contributing to the volatility. As of this year, Chinese equity market is ONLY second after Greece, in terms of volatility. Interesting point today is that the VIX index went up ~40% in one day after Greece announced “bank holiday” and limited their negotiation with any parties of interest.
Back to the Chinese vs. US government way of stimulating the economy. A big reason for stimulating the Chinese economy is to unload the risk associated with highly leveraged debt of Chinese companies to the general public. As of today, the Chinese central government is utilizing the equity market to stimulate the economy while the the Fed is utilizing debt to do the same. Chinese stock rally has successful unload tons of debt to the general public. Although I think their original intention was to unload the risky debt to the institutional investors (who currently owns only ~20% of the whole Chinese market). On the other hand, Fed’s QE has basically unleashed hundreds of billions of dollars into the economy through bond purchases. Bond purchases was a hard concept for me to grasp at first. It basically entails the Fed handing ~$50-80B of US Treasuries per month to private (not owned by the government) banks. The Fed then buys these Treasuries, therefore creating a transaction. This act simple releases billions of US dollars into our economy. The way Bank of Japan (BOJ) is stimulating their economy is a whole new beast of its own. I will write another report on my perspective of BOJ’s “excessive” quantitative-easing.
Intersection notepad 