The hard crash of China Markets. Is it time to buy?

In the last 17 sessions of the Chinese markets we have seen the biggest drop of the main indexes in mainland China. The Shanghai Index slumped 33% or 1/3 from the top reached in mid June,  meanwhile the Shenzhen market has done even worse. The first days, the correction seemed to be just one of the little pauses that investors were used to see during all the long ride of the Chinese indexes. Very soon it started to be clear that this time the correction was a little more considerable than usually and after the close of the weekly candle (long marabuzo) some institutional investors and speculators started to liquidate their positions heavily.

The markets’ capitalization topped $10 trillion in June before burning out around $3 trillion of value. Presumably, this wealth created by the Chinese markets in the last two years use to belong to Chinese people that for a while, they thought to have find the road to become reach quickly. Unfortunately for them the markets don’t work that way. Finance has some strong rules as any other sector and one of the most important is: the faster you go up, the faster you’ll come again down. The law of gravity is as strong in finance as in physic. Chinese people that have opened millions of trading accounts per week, probably will understand this time that nothing can go up forever.

It is still not clear what sparked this deep crash but most likely it has been the decision of some main international investors to cash. It’s understandable, that after days of bull run and after several voices which started to speak about a potential bubble in these markets some investors may have wanted to liquidate some of their positions. Once that the speculators understood that the probability to succeed this time going contrarian was higher than ever the circle was closed.

Now, what can we expect from China markets? Technically the up-trend is not totally damaged by the 33% correction and the Shanghai Index could find strong supports at 3.200 points. It will be a period of consolidation and distribution before we see again the bull running on the Chinese markets but realistically we believe this deep drop has not much similarity with the drop of the Nikkei Index in the far 1989th . So we do not expect the Shanghai index to remain below its tops for many years as it happened with the Japan index. The economic situation is much different and the Chinese economy hasn’t yet exhausted its potential of growth. True is that, the markets needed a correction and the Chinese economy has slowed down the last period but the government is not indebted and has strong potential to boost the economy growth.

In some cases we have seen companies evaluated much more the fair price but actually the price/earnings of the market is less than 20 and we consider this as an opportunity to buy. For many international funds that have been scared by the parabolic growth of the Chinese markets and have been waiting at the window, this could be the moment to start accumulating gradually. For many individuals that want to diversify the portfolio with these indexes, which have no correlations with the US and European indexes, this could be the moment to start looking at the exchanged trading funds related to the China markets.

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