One may ask what was really going on in the Chinese stock market that made it collapse all of a sudden. And you may wonder and think will it ever happen to the Philippine market? To answer that question, I think not anytime soon unless all our countrymen will speculate and invest blindly at the stock market. I’ll explain why.
The collapse of the Chinese stock market
When investors become optimistic in the market, they tend to buy more stocks because they think that the market is good and will continue to rise. So investors buy all sorts of stocks that they speculate will perform good in the long term. When too much buying happens, stock prices will rise because of higher demands. It came to a point where prices rose so high and still, investors are still willing to buy at these higher prices. The investors bought so many of these stocks that one day, the market realized that the prices are too high compared to the actual value. So one day, these investors lost confidence in the market and started selling fast. Now, there are so many investors selling stocks but no one is willing to buy them. In turn, the stock prices fell so fast and resulted to even more selling. And that what’s happened to China, a complete market collapse.
In China, overconfident, unqualified and misinformed investors have been investing at Chinese stocks for quite some time now. And these investing mania drove stock prices at unrealistic values. The problem is that these misinformed investors leveraged themselves and bought stocks at margin because of cheap and easy borrowing. Now as time passed, people got great returns and invested more on borrowed money. So what happened is that stock prices continued to rise even higher now forming the Chinese stock market bubble.
Even though the stock market is rising, the reality is that China’s economic growth isn’t even growing strong. The smart and intelligent investors realized this and saw the gigantic bubble ahead of them.
This led to massive selling pushing stocks down to what really the actual values are causing a market correction but these drop in stock prices caused the overconfident, unqualified and misinformed investors to panic and sell more causing the stocks to go further down in value. The bubble bursts.
Now in the Philippines, this will not likely happen for the next years to come because Filipino investors make up only 1% of the total population in the Philippines. But still, the Chinese economy is linked to the global economy in various ways most especially in the banking system so if the Chinese economy continues to worsen, the Philippines and other parts of the world will also suffer in the short to medium term basis.
Happy investing!