…Bust?

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Recent news on the Chinese stock markets has indicated an ability to defy gravity (here and here), and there has been a growing consensus that the market is an over-valued bubble. However, the sheer number of investors (there are now over 100 million individual securities accounts, and growing – though active investors are estimated at some 20 million), combined with a lack of alternative saving and investment options, has shielded the market from a big crash. There have been a couple of falls to date, following government warnings and, finally, action with bottom-line impact in the form of increased stamp duty. The most recent came today. The FT reports:

    “China’s stock market fell more than 8 per cent on Monday despite government reassurances, extending last week’s big losses after the government increased the trading tax to cool market frenzy…The benchmark Shanghai Composite Index fell 8.26 per cent to 3,670.4 points after a volatile day in which turnover was only around half the record highs reached last week…The fall is the largest since February 28, when a Chinese share price plunge was blamed for spooking markets from New York to Mumbai, but appeared to have very little effect on other Asian markets.

    ”The market dropped because of worries about unpredictability in government policies,” according to one regulatory source. ”The government is not planning to introduce any new policies immediately because it wants stability not a market crash.”

Despite the warnings, and actions, many believe that the market will continue to rise (occasional corrections aside) in the short to medium term. The China Economics Blog, made some brave predictions (see below) in a recent post. As it says, “let time be the judge”:

    “1. Stockmarket will continue to rise perhaps by another 25-30% over the next 6 months to a year. 5000 could be the psychological barrier that is a digit too far. There will be a series of small hiccups on the way.

    2. What will follow will be a trigger than may, by itself, seem quite unimportant that will lead to a widespread sell off of Chinese stocks with perhaps a 10-15% one day fall.

    3. Over the next year shares will fall by as much as 40-50% off their all time highs before stabilising.

    4. The knock on effect on the world markets will not be as great as some commentators fear but there will be some contagion effect on neighbouring exchanges.

    5. Internally, real estate prices will fall and many individuals will be wiped out. Given the large share holdings by the Police, Army and state owned enterprises what happens then is anyone’s guess but it could conceivably get quite ugly quite quickly.”

The possibilities (if not the stock prices) are, of course, endless. However I will be reporting on events as they unfold. In the meantime hold on to your hats!

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4 Responses to “…Bust?”

  1. Jeremy Gordon Says:

    The correction continues 5 June: “Chinese shares down drastically amid sell-offs in morning session”. People’s Daily: http://english.people.com.cn/200706/05/eng20070605_381011.html.

  2. Jeremy Gordon Says:

    But…there is a bounce: FT “Shanghai shares rebound to end higher” – http://www.ft.com/cms/s/69501110-1320-11dc-9866-000b5df10621,dwp_uuid=eaa4d862-6d69-11da-a4df-0000779e2340,_i_rssPage=eaa4d862-6d69-11da-a4df-0000779e2340.html

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