On Monday, July 26th, 2021, the Mainland China stock market fell as a risk aversion selloff persisted on fears about Beijing’s crackdowns on industries ranging from technology to real estate and education. Meanwhile, the market mood was pulled down by tensions between Washington and Beijing, as a high-level summit between the two economic superpowers got off to an unpleasant start.
The benchmark Shanghai Composite Index fell 2.34 percent, or 82.95 points, to 3,467.44 at the close. The Shenzhen Composite Index, which measures stocks on China’s second exchange, dropped 2.28 percent to 2,411.81, or 56.33 points. To 4,925.30, the blue-chip CSI300 index fell 3.22 percent, or 163.93 points.
A proposal by Beijing over the weekend to prohibit academic tuition groups from generating profits, raising capital, or going public caused the market ruckus. Fears of greater regulatory tightening in the world’s second-largest economy have been voiced in response to Beijing’s crackdown on education enterprises.
Over the last year, Beijing has begun a series of crackdowns on fast-growing industries.
Regulators abruptly halted Ant Group’s record-breaking $37 billion first public offering in November. An anti-monopoly inquiry into Ant affiliate Alibaba and other major e-commerce platforms followed, as did a larger crackdown on technology companies. New restrictions limiting listings abroad for Chinese businesses whose data-gathering activity includes more than 1 million people were established shortly after Didi’s New York IPO last month.
On Monday, the Chinese yuan plummeted to a near one-week low versus the dollar, in accordance with the central bank’s lower mid-point fixing. The People’s Bank of China (PBOC) fixed the midpoint rate CNY=PBOC at 6.4763 per dollar before market open, down 113 basis points (0.17 percent) from the previous fix of 6.4650. Onshore yuan CNY=CFXS was changing hands at 6.4841 in the spot market, 34 pips lower than the previous late session close.
However, in recent years, the price of real estate in China has continued to rise fast. As a result, the home price to income ratio becomes significantly skewed, and a house price bubble develops gradually. As can be seen, this unusually fast-rising tendency has resulted in a slew of possible issues. On the one hand, the quick rise in property prices has created an imbalance of surface demand and supply, resulting in an overheated economy and a housing price bubble, which has a substantial crowding-out effect on the actual economy. When this rapid expansion can no longer be sustained, the bubble will burst, resulting in a general economic downturn.
More significantly, it will plunge the economy into depression, as was the case with the subprime crisis in the United States in 2007, which was triggered by the collapse of the real estate market. That crisis was both a housing and a financial market disaster. On the other side, a rapid rise in housing prices, or unreasonable housing prices, will result in a substantial drop in most ordinary people’s home consumption levels, affecting people’s living standards. It also jeopardizes the economy’s and society’s stability.
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