International | May 30 2007
By Greg Peel
The exploding Chinese stock market is in everyone’s sights at the moment, with bubble warnings coming from far and wide. It follows that the more there are warnings, the less likely an event is to happen, but with hundreds of thousands of average Chinese citizens opening trading accounts for the first time every week it is hard to tell just what reaction there may be to this news.
The 9% fall in the Shanghai indices that occurred in February was due to a combination of factors. Firstly, the market was simply considered to be overblown. Secondly, there were fears of increasing inflation and an interest rate hike. But the real trigger was probably an announcement by the Chinese authorities that they would crack down on illegal share offerings and insider trading. This was at least enough to see a retreat to the sidelines that grew into the worst single day’s fall in ten years.
While the Chinese have become less sensitive to interest rate movements – in the last two weeks there was a rate hike, the reserve deposit requirements were increased once more and the currency trading band was increased – an increase in stamp duty from 0.1% to 0.3% overnight actually hits right in the hip pocket.
The Chinese market is up over 50% for the year, shaking off the February factor. Millions more Chinese now own shares, from big wigs to school teachers. One of the greatest concerns is that greenhorn Chinese investors are largely oblivious to stock market risks, and that many have overextended themselves to join in the supposedly guaranteed bonanza. If there is any rush to take profits to account for stamp duty, it could get nasty.
The Chinese market is now firmly in the scope of global investors. Many were caught out by the global fallout from the February fall, although other factors – such as the US sub-prime crisis and the yen carry trade – were exposed as a result of the panic and exacerbated the situation. The Chinese stock market is up 50% this year. In theory it could fall 10-20% and still look pretty healthy in global terms. But if a turnaround started today, would the rest of the world shrug it off? Unlikely.
But then neither can a panic reaction in China today be guaranteed. Time to be cautious.
