Thursday, 3 April 2008

Stockmarket crash update

It is time again to revisit my stockmarket predictions on light of the 45% fall off its peak in October last year.

Here are my predictions from back in May 25th 2007. A good forecaster always returns to him original estimates.

When the first article was written the Shanghai Composite Index was around the 4000 level. So far so good then - although I missed the top the fall back so far is bang on with potentially worse to come.

China's Stockmarket - "how does it work"? [China Economics Blog May 25th 2007]

and a later update:

China Stock Market Bubble update [China Economics Blog 30th August 2007]

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.

The New York Times cover this issue in today's paper. I include some of the more interesting quotes although the whole article makes excellent reading. The real life stories bring home the potentially devasting long term consequences.

To See a Stock Market Bubble Bursting, Look at Shanghai [New York Times]

The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.


Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.

This next quote shows the scale of the possible problem:

In China, the government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors’ anger.

“Actually there are a lot of complaints, but the Chinese media can’t report this,” says Mr. Guan, the former real estate company owner.

Now, in the brokerage house corridors — corridors of pain — one can hear complaints about all the market flaws: the government doesn’t regulate the stock market and it participates in it by allowing mostly big state-owned companies to go public.

There are also complaints about insider trading, stock manipulation, and big investors with government connections, pumping and dumping stocks on small investors.

Finally, it appears that the Chinese are finally working out that fear and greed are not equal and opposite. Greed is a slow burner while fear strikes hard and fast.

“Look,” he said, “it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500.”


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