Tuesday 5 June 2007

Chinese Stock Market Bubble Deflates a Little

There have been numerous posts on the "Chinese Bubble" on this blog such as:
China's Stock market - "how does it work"?
Who is REALLY inflating the "Chinese Stock market Bubble"?
"Bursting Chinese Bubble" - a contagion effect?

The first of these even includes my predictions of what would happen for all to judge.

The last week or so and seen the first signs that investors are beginning to hit the panic button or as we call it in the west the "puke point". This is when markets have fallen to such an extent that fear really takes over.

Remember though, the stock market could fall over 60% and still be around the same level it was a year ago.

The third post above argues why there will be NO or very little contagion effect. So far, so good.

However, we should look at what has happened recently. For one, the introduction of stamp duty (which was tripled last Tuesday) was a wake up call and a trigger.

The stock market fell 8.3% yesterday with the cumulative losses amounting to $40bn since the stamp duty affair.
The first signs of panic selling in China began last Wednesday after the government trebled the stamp duty on share trading. The market has now fallen 15 per cent from its high last Tuesday to close at 3,670 points yesterday.
[FT leader]
So will the current fall lead to a full scale "pop". There are argument both ways. Yesterday many stocks did fall by their full daily limit suggesting further falls to come.

However, we now need to consider the political fallout from a crash.

Many stock market bulls would argue that the Chinese government will not let the market crash and will buy up stock using its vast reserves. This would effectively put in place an artificial floor to the market.
The government has a history of market interference owing to its concerns that share price volatility could lead to social unrest involving angry investors.

The country's three official securities newspapers carried editorials yesterday arguing that the market trend was positive and the tax increase was aimed only at speculative investors.

The government's propaganda officials routinely order the media to run articles and reports that support policy initiatives.

China also has excessive liquidity - the money must go somewhere.

The Chinese economy is still growing strongly and is on a relatively sound footing.

Still, stocks are overvalued and a correction is likely. However, I suspect we will see another upturn before the really big one.

The final point relates to post 2 above - who really owns Chinese stocks - more digging is required here.

Some references:

China correction [LEX FT]

Attempts to reassure investors fail to halt slide in China's shares [FT front page]

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