Back in February, when the Chinese stock market experienced a sharp fall, markets across the world fell in its wake. For a while it seemed as if the good times were over, and that the stock market crash of 2000 had resumed. But yesterday saw another Chinese collapse, but this time the rest of the world just carried on regardless.
The Chinese fall was serious, but could have been even worse. The Chinese headline index – the CSI 300 – fell 6.8 per cent on Wednesday and another 1.3 per cent today. But, curiously, the impact of Wednesday’s fall was constrained by Chinese regulations. There’s a 10 per cent limit on the amount a Chinese share is allowed to fall in one day, and Wednesday saw no less than half of CSI 300 shares fall by that amount. All the more curious then when you consider that this morning the fall was only 1.3 per cent.
It just goes to show how speculation can exaggerate trends. It seems likely that if it wasn’t for the government’s 10 per cent limit, Wednesday’s fall could have been much worse, with panic setting in, perhaps triggering falls elsewhere. But as it is, China’s rather un-capitalist regulations softened the blow and perhaps saved a world-wide rout of the capitalist system.
But there is another difference between the fall this time and the February drop. This time around it was deliberate. The Chinese government wanted to see a market correction; it wanted to try to slow the stock market’s bull run, and, with this in mind, trebled stamp duty on shares. It was this hike in tax that led to the market falls. It appears that, this time, it was a government induced sell off, designed to limit further panic that caused the fall. If you like, it was a controlled explosion.
And perhaps that’s one reason why the rest of the world did not see falls in China’s wake.
Another reason is this.
In the last few days, there has been growing speculation that a collapse in the Chinese stock market, while serious, would have limited impact on the global economy. Sure, the Chinese stock market is growing, but it still only represents around 4 per cent of global shares by value. Compare this with the size of the Chinese economy, which is now the fourth largest in the world. You see the juxtaposition? Chinese economy – huge; Chinese stock market – still tiny.
Besides, between 2001 and 2005 the main Chinese index fell while the economy grew by over 46 per cent.
Perhaps a more pertinent point is this. Sure, Chinese stocks are expensive; the total market capitalisation of the CSI 300 is 46 times earnings. But then again, high profit to earnings ratios are justified if growth is rapid, and it seems likely Chinese profit will continue to rise rapidly. Maybe the markets just need time to let profits catch up with valuations.
A crash in the market is likely, but maybe a soft landing is possible; maybe a few years of stagnant growth can be engineered. It’s similar, in a way, to the arguments put forward over the UK property market. Houses are overvalued, but while some argue a crash is therefore inevitable, others say we will simply see a few years of modest growth, giving time for income and the eroding power of inflation to gradually correct the balance.
Then again, impatience could get in the way of that. The Chinese stock market is a bubble. It must be – both the former chairman of the Fed Alan Greenspan and the chairman of the Chinese central bank Zhou Xiaochuan, have said so. Bubbles are created by speculators seeing a route to easy money. If this route is blocked, they tend to run.
But perhaps the big factor that will determine the course is fear; fear of losing out on a bull run, of selling too soon; fear of selling too late.
Read on to see how this dilemma has been felt by one of our readers, and see how one of the finest minds Britain has ever produced got it wrong and eventually died a relatively poor man, even though his status as a genius was unquestioned.
© Investment & Business News 2013