►Since peaking in 2021, the Chinese stock market has seen over $6.3 trillion go up in smoke
►The PBOC has announced that they have reduced bank reserves in an effort to support the struggling economy
►As the Chinese economy recovers, industrial activity is expected to increase, leading to higher demand for silver
Since the peak in 2021, over $6.3 trillion has vanished from the Chinese stock market. This collapse of the Chinese stock market reveals a painful truth for the government of President Xi Jinping: confidence in the world's second-largest economy is very low, and this pessimism is becoming increasingly difficult to ignore.
This month's heavy sell-off in the CSI 300 Index, the main Chinese stock index, shows a 40% drop over the past three years. Although the stock market represents a smaller portion of household wealth compared to real estate, the falling stock prices serve as a very public reminder of the problems in the real economy, such as declining house prices and rising trade tensions. The decline risks dampening consumer spending and business investments, which could further exacerbate economic problems. There is growing debate about whether China's economy will ever surpass that of America, or whether it is instead heading for a stagnation similar to Japan in the 1990s. On Saturday, you will receive a very interesting blog from Jeroen Blokland that further discusses this.
However, the PBOC (People's Bank of China) announced yesterday that they have lowered bank reserves, in an attempt to support the struggling economy and boost consumer confidence. The central bank will reduce the reserve requirement ratio (RRR) by 50 basis points from February 5th, which allows for the application of qualitative easing.
If China decides to apply quantitative easing again, it could be beneficial for your investments. However, this could also lead to a resurgence of inflation, which is less favorable for your wallet. With soaring debts and high interest rates, this policy seems unsustainable. China, the second-largest economy in the world, is now the first to take this step, but will other major economies follow?
As seen in the image, American and Chinese stocks are increasingly diverging. If we apply technical analysis, the two world powers could once again converge. A 'double top' may indicate a reversal of the upward trend - conversely for a 'double bottom'. If American stocks fall and Chinese stocks rise, the patterns could approach confirmation. We are keeping a close eye on this.
When the Chinese economy recovers, it is expected that industrial activity will increase, leading to higher demand for silver. This could result in an increase in the silver price. Currently, the price of physical silver on the Chinese market is already more than 10% higher than the prices quoted on the futures markets in London and New York. If this trend continues, the distinction between owning physical silver and holding paper silver contracts will become increasingly clear...
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