| The Chinese stock market does look irrational to me. Will it crash? I think any market that experiencing this kind of irrational exuberance is bound to have major correction, be it in the US or in China. But what worries me about the China market is that eventually when the bubbles burst, it's the average small investors who will suffer the most. Many of these folks have little knowledge of what they are buying into. And as dessa upstairs said it the Chinese companies still lack the much-needed and regulated transparency. Average small investors simply have no tools to judge the quality and financial strength of the companies they have bought their shares. It's scary! The major reasons for the escalating Chinese stock markets are many folds. I'm not a pro, but I ived in Shanghai for 4 years, and my observations may have some validity. 1) Lack of investment channels: The interest rates paid by banks for savings is pitiful. I believe I was getting 1.7% for a 3-month term deposit. Yet, I'm getting 4.7% for money market fund, which I can liquidate any amount of money within one business day. So anything with substantial higher yield attact people to flock into. 2) The housing market has suffered prolonged setbacks due to a series of new govermental tax laws implimentated since March of 2006. Shanghai's real estate market appreciated so much so quickly between 2001-pre-Feb.2006 that many foreign buyers bought properties there. In addition, major foreign real estage funds also bought a number of highend commercial properties. That all said, people shift their money to the stock market from the real estate market. 3) The expectation of Yuan appreciation also propelled much "hot money" pouring into China. Well, Yuan has appreciated a good 6% since China abandoned pegging its currency to the USD. There are all kinds of rumors about how much more Yuan will appreciate. Time will tell. 4) Sheer herd mentality. Word of month quickly spreads news both good and bad. Personally, I wouldn't want to invest in the Chinese stock market, but I may shelter some money into an US mutual fund that invest in Chinese companies. |
Chinese Stock Market is Crazy