about 1 month ago • 2 mins
What’s going on here?
Reports showed that China is preparing a rescue mission to bring a much-needed $300 billion back onto its shores.
What does this mean?
The Chinese economy has been wedged in place for the last couple of years, and so far, the government’s reacted with the financial equivalent of a slight push on the backside. But China’s stock market has already fallen another 7% this month alone. So now, it’s time to hand out a hearty kick: the government’s reportedly considering raiding state companies’ offshore accounts, a bounty of roughly $300 billion that could be funneled straight into the economy. But put that into perspective: when the US and Europe had to stabilize their own economies, they were spending closer to the $1 trillion mark.
Why should I care?
For markets: Blame the snowball effect.
China’s problems could have been exacerbated by the use of a complex investment called “snowballs”. Here’s how they work: brokers take out options on a stock market index, trades that are designed to do better than the actual index itself. Investors buy the snowball products, pocketing a profit if the stock market stays within a pre-set range. In theory, the brokers make enough cash by beating the index to pay investors and make money doing it. Problem is, if the index dips below the set range, the snowball automatically stops and brokers must sell their options – and that sell-off sends the market even lower.
The bigger picture: Fear is in the air.
Buffett said to be greedy when others are fearful, and fearful when others are greedy. Well, investors sure are fearful about China: the country’s MSCI index is lower than when it started over three decades ago, and Chinese stocks are about as cheap as they ever have been relative to the US. But if you make like Buffett, be sure you handle the country’s woes getting worse before they get better.
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