Monday, October 18, 2010

Shanghai market falls 8.8% Feb. 2007

The Shanghai market bubble appears to have burst yesterday. the market which had doubled in value over the past year was regarded by leading Chinese authorities as overvalued and ripe for a major correction. About 102 billion dollars of value was wiped out in the market plunge. One leading official had warned that the market was overbought and that as many as 70% of the stocks were essentially worthless. But because of the shortage of available equities, the high savings rates among the middle class and the siren allure of the market people had continued to purchase shares right up until the fatal moment. The collapse in Shanghai spread to the rest of the world, particularly in the US and western Europe . The Dow Jones at one point was down as much as 546 points but by the market's close had recovered to being down some 400 points or 4.3 %. This fall , the largest since just after 9/11was possibly made worse by Alan Greenspan's recent musings about recession as a possible outcome of recent economic trends.

Now that Chinese investors have tasted the bitter fruits of a major correction it will be intriguing to see if this affects the popularity of stocks in China where there are currently some 80 million brokerage accounts.

The Hong Kong market was down 1.8%, the Japanese only 0.52 %, the British 2 3%, the Germans 2.96 5 and France 3.02 %. All told more than a trillion dollars in capitalization was wiped out world wide.

Stock markets these days are relatively high risk investments. This is particularly so in China.Because of the inter country global linkages events in one country rapidly influence events in another and the effects are magnified. As always, irrational impulses rather than reason are often more influential.

The markets bear careful watching for the next few days to see if this is simply a"correction" or if it is the beginning of a global bear market which will have repercussions on the so called real economy.

These repercussions occur because of the feedback mechanism from stocks to company financing and therefore investment intentions and consumer behaviour as well as central bank policy.

In a world already shocked by global oil prices rises such a possibility cannot be ignored.

No comments:

Post a Comment