Friday, 25 May 2007

China's Stockmarket - "how does it work"?

I am aware that there have been a number of posts on the Chinese stock market on this blog recently.

However, given there may be a more general "economics" audience and other interested travellers I am posting an article from today's Independent that gives a nice little overview of the Chinese stock market and how it works (it is part of a much larger article dealing with the Greenspan comments - see previous post).

Before the article here is my prediction - 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.

Greenspan's warning for China
China operates two stock exchanges on the mainland, in Shanghai and Shenzhen, as well as the Hong Kong Stock exchange, which is entirely separate.

The Shanghai bourse is the larger of the two - the Chinese government maintains a controlling interest in many of the companies listed in Shenzhen - but the combined total market was capitalised at around $500m at the end of last year.

Domestic investors have a choice of around 900 stocks, but two types of share are traded. A shares, with prices in the local currency, were originally off-limits to overseas investors, though this restriction was relaxed to some extent in 2002. B shares, meanwhile, are priced in US dollars, tradable by both domestic and foreign investors. The Chinese government plans eventually to merge the two classes.

Investment amongs the Chinese middle classes has until recently been limited, but has rocketed over the past year.

According to the China Securities Depository and Clearing Corp, which is jointly owned by the Shanghai and Shenzhen stock exchanges, the number of trading accounts has risen by 30 per cent over the past year to 95 million. One sixth of these have been opened in the past four months, and on one day alone last week, investors opened 552,559 new accounts.

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