Monday 5 November 2007

China stockmarket reversal November 2007

Could this be the beginning of the fall in China shares to a more realistic level?

Daily falls of over 2% can be considered serious. There could be further trouble ahead. My doom laden economists prediction is that the major fall out will occur close to the Olympics when the world's attention is on China. Then we we see fireworks of all types.

Chinese share prices go further down

Chinese share prices Monday continued the downward trend on last Friday with the benchmark Shanghai Composite Index closing the daily trading at 5,634.45 points, down 2.48 percent.

The Shenzhen Component Index on the smaller bourse in Shenzhen ended at 18,116.88 points, down 2.41 percent.

However, the combined daily transaction volume on the two exchanges increased sharply to 197.2 billion yuan (26.4 billion U.S. dollars) from the 158.4 billion yuan on the previous trading day.

These falls come on the back of Greenspans comments on the 30th October:

The stock market bubble of Chinese characteristics [China Elections and Governance]

On October 30, Alan Greenspan issued another warning on the risk of a Chinese stock mar­ket bubble. A few months ago, when China's stock index rose by more than 90% over a year, Greenspan expressed concern that the market could experience a "dra­ma­tic shrinkage." At present, the Shanghai and Shenzhen 300 Index has risen 170% this year, allowing China to surpass the US in the number of its companies within the world's ten largest by market value for first time. October 24, investment master Warren Buffett also issued a warning that China shares were rising too fast.

The judgments of "Greenspan" and "Share God" Buffet may not always go unchallenged, but few financial experts would deny that China's stock market prices and risks are on the high side. Interestingly, China's crazy stock market resembles its hypertrophic economy in repeatedly having the last laugh on pessimists' predictions, leaving at least some experts wary of forecasting what the price level of China's stock market will be, or how a major adjustment might take place. It appears that as with "socialism," stock market bubbles in China have some indefinable "Chinese characteristics."

The Chinese characteristics of the bubble are derived from those of the stock market itself. The first of these is that state-owned enterprises occupy a dominant position, whether in the proportion of the assets of listed companies, or equity ratio, state-owned property is absol­u­tely dominant. More importantly, the structure of property rights in the economy on which China's stock market is dependent, is still more unique, in that control of the major­ity of non-financial assets, above all in land, is in the hands of the government, while the im­mov­able property that ordinary people can freely transfer is only a small fraction of the total. The major part of personal assets are deposits and other financial assets that can be depreciated by the government at any time. As I have pointed out before, this abnormal structure of property rights is the inevitable result of the "separation of powers without separation of property" in China's reforms.

Opening up secondary share markets in such a context necessarily results in a large amount of money chasing a small number of stocks, totally detaching stock prices from corporate book profits. This problem in fact existed prior to the share market reforms, but people were so naive as to think that after the share reform this issue had been over­come and share­holders could expect to operate rationally in accordance with classic textbooks, rather than the "irrational exuberance" of price-earnings ratio of up to 80—even several hundred —times. It now seems to have been impossible for the share reforms to resolve the problem of Chinese residents of lots of money but few investment opportunities. measured by their price-earnings ratios, Chinese shares must therefore break through the normal level of states which have private ownership; this is the first of the Chinese characteristics of the stock market bubble.


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