Thursday, 8 November 2007

Chinese bubble begins to burst

Not a moment too soon the Chinese market is beginning to see the first signs of some reality sinking in.

Chinese share prices fall drastically [People Daily online]
Chinese share prices nose dived on Thursday after a timid rebound on the previous trading day, with the benchmark Shanghai Composite Index closing at 5,330.02 points, down 4.85 percent.

The Shenzhen Component Index on the smaller bourse in Shenzhen ended at 17,465.46 points, down 4.21 percent.

The combined daily transaction volume on the two exchanges stood at 128.2 billion yuan (17.2 billion U.S. dollars), up from the 112.58billion yuan (15.1 billion U.S. dollars) on Wednesday.

So what were the catalysts?

Clearly the recent stock market floatations that went to huge premiums on day one and numerous articles about the first trillion dollar company, PetroChina, ram home the excessive valuations.

PetroChina tops trillion-dollar mark[LA Times]

Secondly, we had the Buffet and Greenspan warnings:

Buffett calls for caution over China stocks[FT 24th October 2007]

Chinese investors reject Greenspan warning[Reuters May 25th 2007]

Greenspan's warning for China [Independent 25th May 2007]

third, we have the recent regulation changes delaying the ability of Chinese residents to buy Hong Kong shares. This may have been the straw that broke the Chinese camels back.

China puts Hong Kong share plan on ice [FT November 4th 2007]

China has in effect frozen a proposal to allow mainland citizens to buy shares in Hong Kong, a decision that threatens to undercut the recent surge in the former colony’s equities market to record highs.

Wen Jiabao, the premier, has attached four conditions to final approval for the scheme, all of which are so open-ended that Beijing could take months, if not longer, to permit it to go ahead.

In reality there could be any number of reasons (the falling dollar, political pressures, oil price rises, inflation in food prices, increases in wages) but what it is important to remember is that the political ramifications from a share price collapse are potentially enormous. With the military and state owned enterprises owning a large amount of stock in addition to the millions of individuals the implications for the stability of China should not be underestimated.

I am sure this topic will get more coverage in the days and weeks to come.

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