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Sunday Summary: The China Situation, Gambling on Digital Currency, Mixed Demand For Gold

In April 2020, came under new management, articles published before this time, such as the below, may not reflect the views or opinions of the current team.

Although seeing massive gains in recent years, the Chinese stock market had it’s first real test in the last week with losses of between 5.1% and 5.5%. This amounts to around 2.4 trillion USD in China’s equities, with flow on effects to commodity markets such as copper, along with limited losses in international stock markets. The biggest losses directly related to the China situation were observed in Japan and South Korea, while smaller losses were also noted in Taiwan, Singapore and Philippines.

Buying shares and borrowing money was previously heavily regulated in China, with major changes to this policy occurring recently in 2010. Following the move to allow citizens more freedom in borrowing and share market trading, China has seen a rapid increase in GDP, doubling since 2010 until the recent crash this week.

While many are worried, professional investors believe it is unlikely to be a major issue. The Chinese stock market is very different to stock markets in other countries, while the top 10% of investors on Chinas stock market are high level finance focused companies and individuals, who make a living off movements in the market, the other 90% is made up mostly of entry level or retail based investors. Adding to this, only around 40% of the companies which make up Chinas GDP are listed on the stock exchange.

With such a high level of everyday people making up the main investment in Chinas stock markets, the drop in value could simply be an over reaction to the situation in Greece. These losses likely do not represent a loss in value or demand from China’s goods and services, instead are related directly to the opinions and decisions of their everyday citizens, many of whom do not have a professional background in finance.

Retail buyers quickly made it clear they expected their government to step in and boost the market back to it’s original state. Beijing responded to limit further ‘panic’ selling by suspending public offerings and taking measures to assist investors in borrowing more money to invest in stocks. The PBOC has also made it clear they are willing to provide an unlimited supply of funding to the CSFC which will then flow on as loans to stock brokers for speculation.

With government intervention however, any future losses could spill trouble further into the Chinese economy, while at the moment the main effects are felt in the portfolios of household investors, any future movements without effective repayments beforehand could result in instability being felt through the Chinese financial system as a whole.

The losses from Chinese equity markets have had a flow on effect to the Australian Dollar, with a drop of 2.683 US cents since the 3rd of July to the close of weekend trade on July 11th . A recovery has however been seen since the lowest point last Wednesday the 8th, between then and now the AUD has recovered a total of 0.606 US cents.

The fall due to Chinas sudden stock market sell off’s appear to have affected the AUD far greater than the direct effects from the Greek / Euro situation, however it could also be attributed to a compound effect, leading us to the current point we are at now.

Chinese and other Asian markets began recovering throughout Friday the 10th of July, before the close of trade.

Chinese household investors gamble upon investment into virtual currencies (crypto-currencies)

Bitcoin seen a major increase in value from July 10th, with major demand entering the markets as the weekend began around the world. Speculation is that these purchases were made by further household buyers unaware of the past weeks events. The further into the weekend the more Bitcoin was gaining, before closing at midnight Sunday on a high of 297.01 USD, a rise of 27.06USD or just over 10% total value.

Chinese speculation on other crypto-currencies haven’t proven such a success, Bitcoin rival Litecoin saw a doubling of its value since July 5th in the midst of the Chinese sell off, however fell back to almost it’s original value before midnight on the 10th of July. At the same time as the sell off in Litecoin, Bitcoin gained value extremely fast, this could either be the Litecoin investors switching to Bitcoin, or a signal that Bitcoin may be in trouble come next week, when market data is once again made available, and decisions are not based upon people buying due to catching up on past data, but instead acting upon actual live data.

Greek concerns during this time did almost nothing to virtual currency prices, however China and other Asian countries have a very large following in Bitcoin and Litecoin.

Virtual currencies (known by their followers as crypto-currencies) are extremely volatile, and in my personal opinion, not a safe haven. However as we have seen with these movements, they can be subject to extremely fast buy and sell gains in the space of a few days when perceived crisis hit the Asian region.

When Bitcoin first arrived on the scene, it jumped from $70 USD to around $1,240, before a rapid decline back into the region of around $400USD as of last year, and $250 – $300 USD as of this year.

Unlike other currencies, it’s very difficult to speculate upon, and unlike major markets, crypto-currencies markets are unregulated, meaning the possibility for massive buys and dumps would result in no legal responsibility, manipulated values by capitalising then producing mass buy and sell signals can produce quick gains by those with enough exposure. Whether this is happening as yet is unknown, but the possibility is definitely there.

Learn more about Bitcoin and Chinas exposure: Click Here to view a short documentary.

Rising retail demand for Gold but large safe haven investments lacking.

An increase in retail buying of Gold in recent days has not stopped the Gold price from taking a fall, Wall Street and other full time investors appear reluctant to enter the market as a safe haven at the present time, the loss of gold’s value during this time was due mainly to movements in value of the USD. Movements in the Gold price over the last week have mimicked those seen in many major currencies, especially when comparing the AUD to USD charts alongside the USD and Gold.

On the 7th of July gold seen an almost entirely downward trend to a low of 1152.70 USD with volatility until another large drop to 1147.10 USD on July 8th, since then however, gold had a strong but volatile gain towards it’s current position, where some stability appears to have kicked in before closing the weekend at 1163.48 USD (1559.78 AUD).

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