Shanghai Bears

The Shanghai and Shenzhen stock markets are now approaching a level 20% below their peak in mid-October. Such a fall in a year is the rule of thumb for a market in a developed country to be called a bear market. Yet share prices on the Shenzhen exchange are still more than double and those in Shanghai more than four-fifths again higher than they were a year ago.

This is a flow of money bubble — just like Japan’s stock bubble in the 1980s and America’s in the 1990s. Stocks offer a better return than alternatives, which in China, like Japan at the time, are few in number, and so people are borrowing to invest speculatively on the basis that they will be able to get out in time. Full speed ahead and damn the risk.

The smarter fool theory rarely works. When the flow of money gets cut off — for whatever reason: government policy, some exogenous event, an unexpected shock — it drains away rapidly. Stock prices fall quickly and many investors — usually individuals who can least afford it — get left stranded high and dry.

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Filed under Economy, Markets

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