In the UK we know all about the “boom and bust” cycle. China has seen it in the past too. However, it seems that many in China believe the stock market can just boom, boom, boom. Warning signs abound – office staff spend their days working on the markets rather than their jobs, property owners are selling up to invest, and even students and domestic helpers are risking all in order to participate in the gold rush.
The FT highlights a “central bank warning about the danger of an asset bubble” (which adds to earlier official comment ) and notes that the “Shanghai composite index rose 130 per cent last year and is up 50 per cent so far in 2007”. The Chinese government is rightly worried, as a sudden bust could have more than just economic implications, and would likely have the most serious impact on the, generally less wealthy, latecomers to the market. International markets have also recently shown their readiness to follow falls in China , so the impact of a crash will be felt beyond China’s borders. The FT adds:
“Authoritative statements from senior officials about the stock market have for many years set share prices in China, where investors have taken the government’s word as gospel…In the current bull market, however, with new stock trading accounts being opened at the rate of more than 1m a week, the admonitions of senior officials seem increasingly impotent…One of its main drivers remains China’s low interest rates, which offer the country’s thrifty savers a return of just 2 per cent – offering a negative real return compared with inflation of more than 3 per cent.”
The China Economics Blog has also been watching the market, and make the point that the market is being driven in large part by confidence, and that this is being driven by two main factors – structural issues (such as lack of alternative investment channels) and the fixed exchange rate (which “makes it hard to keep credit growth under control”).
It seems therefore that the government will have to do more than issue statements to the press if they are to control the situation. This is something that they must find rather frustrating, but which is a reflection of how fast things are changing in China.
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China stocks keep rising despite warning 
By Jamil Anderlini in Hong Kong and Richard McGregor in Beijing
Published: May 8 2007 21:00 | Last updated: May 9 2007 09:28