The Chinese stock market worsened today as fears of a ‘Chinese credit crunch’ hurt investor confidence. The Shanghai Composite SSE index – considered China’s major financial indicator – dropped by 5.8 percent in early trading before recovering later in the day to end at a 0.3 percent decrease in value.
China’s economy has suffered in recent months as the availability of cheap credit – a major building block for the rapidly expanding Chinese economy – decreased. China has thrived from easy access to credit that has allowed business owners to increase their production at a rapid pace and capitalise on the country’s export economy.
The Shanghai Composite index has decreased in value by over 20 percent since the start of the year, putting China in a ‘bear market’ position. The government recently announced that it would control interest rates to ensure that they were ‘reasonable’ – a signal that has prompted many to lose confidence in Chinese investments.
Many investors are concerned that controls on lending in China could suppress the country’s rapid economic growth and push the country’s economy back. Beijing has announced that it will tighten the availability of credit to prevent a major economic downturn, which has caused many to fear that credit will soon be unavailable.
China’s economic growth has become legendary amongst investors, with the major production economy one of the world’s largest. The government has been central in allowing Chinese businesses to easily access credit, with many of China’s businesses depending on private loans rather than shareholders and private investors.
Due to the country’s reliance on credit, many of China’s largest banks depend on a system of mutual credit for growth and development. Interest rates between some of the banks are as high as 25 percent, leading to fears of a severe credit crunch as Beijing implements tighter controls on interest rates and lending terms.
