A Discussion on Stock Market Changes

Currently, the entire world is facing a stock market crash that originated from China. In other words, the economic power of today’s China is already large enough to impact the entire world.

Initially, after witnessing the extreme behavior of the stock market and the overly high interest rate at which people were borrowing, the Chinese government intervened by investigating borrowing activities at high leverage and high interest rates. Once the investigation began, the stock market went from its peak to a plummet, in which, within a short period a time, the SSE Composite Index dropped by more than 3 percent, with speculators beginning to short sell the stock market index futures in large quantities. Consequently, the government suppressed its investigation of malicious behavior, resulting again in the stock market rising. With the resurfacing of high-leverage and high-interest rate borrowing, investigation ensued, the stock market then dropped, leading to a bailout from the government to purchase stocks with cash. However, after experiencing multiple ups and downs, many investors lost confidence. During the most recent period in which the SSE Composite Index fell to 3,500, the point at which the bailout had previously occurred, the government finally refused to intervene, leading to the index plunging to below 3,000.

Meanwhile, the U.S. stock market also began to crash. In the past eight months, the U.S. stock market has had low volatility, with the Dow Jones industrial average hovering between 17,300 and 18,300, most recently falling below 17,300 with no sign of rebound, and even plummeting to below 16,000. The reasons for the U.S. stock market crash are complicated. The crash of China’s stock market and the devaluation of the Chinese Yuan, together with American investors’ worries over whether the Federal Reserve would raise interest rates in September, were factors that led to the U.S. stock market crash. The crash reflected the investors’ expectation of an interest rate hike.

Why did the Chinese government not provide a direct bailout? The most probable explanation is that the Chinese government wished to reduce its intervention and allow the stock market to find its equilibrium and determine its own stock prices. However, at the same time, the Chinese government decided to continue to improve the business environment by cutting the reserve requirement ratio (RRR). In fact, the reason China’s stock market could begin to rise in November of last year was mainly the effect of the Chinese government’s continual improvement of the business environment, not only continually cutting the RRR, but also increasing the capital construction budget, proposing a “one belt, one road” strategy.

With the A-share crash in China and the U.S. stock market crash, Hong Kong and the rest of the world inevitably followed.

We should focus more on whether the stock market crash will lead to a deterioration of the economic environment, which was why the Chinese government announced cutting the RRR after the SSE Composite Index fell to below 3,000. With the Hong Kong dollar pegged to the U.S. dollar, an increase in the interest rate in the U.S. would inevitably cause Hong Kong to follow, surely adding a burden to the already troubled Hong Kong economy. This is an issue that the Hong Kong government and its residents will have to tackle. Faced with an uncertain future, how many remaining resources do the people in Hong Kong have to continue their internal strife?