Stockmarket prediction update November 2008

I return again to my predictions for the Chinese stock market first made in May 2007.

It has been over a year so it is time to assess where we are and where we might be going.

From a 4000 start I predicted a high of around 5000 and a low of 2000. I missed the top and the bottom but generally speaking we are not too far out. I also thought the bottom of 2000 would have been reached before now. The delay in the bubble bursting is why I believe we went over and under based on irrational exuberance (and other reasons) for China's very own stock market bubble.

The balance between fear and greed is always hard to predict but one thing is for sure fear takes effect a lot faster and fortunes are lost quicker than they are made.

The losses from the 120 million trading account holders will have a large knock on effect on the real economy as fear takes over and investment slows. I still worry that we have my no means seen the worst yet. There are companies and banks with truly dreadful balance sheets and massive numbers of none performing loans.

Yesterday's stimulus package has the smell of desperation.

Is the current 1800/1900 figure the bottom? I doubt it. My prediction would be for 1000 to be tested in the next 5 months. That represents close to another 50% fall. The caveat, as always with China, is that I also believe that the government (and other powerful interest groups) will try pretty much everything to prevent a fall of this magnitude. Given this very real possibility and the fact that Chinese firms are still improving in terms of governance and productivity I suspect that we may only get as low as 1400.

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.

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