A quick glance at our global equity map shows one key consistency; emerging market stocks are badly lagging developed market stock.
Leading the way down is the BRIC complex (Brazil, Russia, India, and China) and China is in the thick of the selloff.
Since the beginning of the year, popular ETFs like the iShares FTSE China 25 Index ETF (FXI) and the SPDR S&P China ETF (GXC) have declined 17.55% and 12% respectively.
Let’s examine three factors that may lead to more downside for the Chinese stock market.
Credit Crunch, Credit Bust
In case you missed it, Chinese banks are in the midst of a minor crisis.
The average overnight Shanghai Interbank Offered Rate (SHIBOR) rose to 13.4% last week, while the one-week repo rate in China's money market climbed to 11.2%, the highest in 10 years, reports Reuters. The SHIBOR is the average interbank lending rate offered by 18 Chinese commercial banks.
Meanwhile, the number of nonperforming loans is rising.
Data from the China Banking Regulatory Commission shows outstanding non-performing loans at Chinese commercial banks rose 20% to $86 billion at the end of the first quarter compared to a year earlier. Yet, those figures don’t really reflect the real amount of bad debt. That’s because China’s banks camouflage losses from bad loans by packaging and selling them as “wealth-management products” that are pawned off to unsuspecting victims.
On June 23, the official Xinhua News Agency acknowledged that risk is increasing in China’s financial system as the shadow banking sector grows along with highly leveraged investments.
This latest episode seems to be following the path of other banking crises; a spike in borrowing costs, panic, liquidity freeze, and cardiac arrest.