Tuesday, June 12th, 2007
A close look at the Chinese stock market
One of the major risks to global markets is a potential crash in the Chinese stock market, which is being increasingly talked about.
I asked a friend who lives in China for their perspective on the stock market there. She fired this off to me:
The view here amongst those who watch it seems to be that the authorities know better than anyone that they have a problem, but they are not going to make shock changes. Just incremental stuff like the tax we saw recently aimed at dampening speculative stock trade. The government risk a lot of unrest if the ordinary people with their savings in stocks lose all their money. The market is full of small-time speculators and people with nowhere else to put their money because of effective negative interest rates on bank deposts here, and it is also true that the ‘gambling’ element is huge here. Even locals call stock investing gambling. (Real gambling is illegal here, which is why there are so many Chinese tourists and businessmen in casinos in Australia, Macau, Singapore etc.)
Very generally, all the markets here (property, stocks, banking etc) still operate within the political framework of the aims of the Communist Party, whose legitimacy is bound up with continuing to deliver the economic growth that has transformed this society since the economy was opened up in the 80s. The Government isn’t likely to encourage a major correction in the stock market before either of two big events coming up on the political calender - the five year party congress in October, and of course the Olympics showcase next August.
There could be more small measures before then because their public comments indicate that they are worried about the stock market frenzy. Their comments, it should be noted, have had much less effect than they have had in the past: an indication that an increasingly savvy public know that the government isn’t in a position to end the party soon. But I think we will watch them experiment a little with other small measures like the tax: to test what effect they can have if and when they want to curb investment in stocks a little more forcefully.
We have seen them use administrative measures (often through the state controlled banking system, and with varying success) to curb over-investment in property and infrastructure in the past. If they want to they can come down hard of course, but short of the stock market threatening other core goals (like economic gowth itself) it is not in their interests right now to shut off the frenzy.
Word Count: 424. This entry was posted on Tuesday, June 12th, 2007 at 10:25 am and is filed under Emerging markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
