Bubble Burst

Bubble Burst

After reaching the peak in Nov. 2007, the China stock market bubble finally burst. The Shanghai index has dropped more than 50% from its all time high.

Let’s take a look at what caused the crash. Same as most of the market crash, the main reason is confidence. When most of the investors lose their confidence, the market crash. Most of the Chinese believed that their government will help when the stock market is in trouble. They believed that their government want to see the stock market goes up. It is more and less because the state controlled economy in China (see in Background and Opportunities).

The followings are used to be the advantage of the China stock market. However, some of those are turning around.


	State controlled economy Too much cash --> too much supply Money Flood from the North



	State controlled economy The state controlled economy allows the government to do something we cannot or won’t do in the US. For example, to control inflation, the only way we can do is to hike interest rate. In China, the government can ask oil company, such as PetroChina (HKG:0875 or NYSE:PTR), Sinopec (HKG:0386 or NYSE:SNP), not to increase the price of their petroleum products while the import price of crude oil has been up 100% in a year. You can imagine what the investors of those oil companies will do -- RUN AWAY. State controlled economy is good for stock market only when the government wants the stock market goes up, not the other way around. When the Chinese government realizes the bubble stock market and the hot money from international speculators make the inflation going to be out of control, a bubble stock market is not what they wants.



	Too much cash --> Too much supply Too much cash is not valid anymore for short term when Shanghai index dropped 50% from the peak. The 7~8% of inflation is also eating up the cash. Although the quota of QFII keeps increasing, the credit issue, caused by the the subprime problem of the US, sucked up some of the cash from the market. On the other side, the supply of stocks increased massively when PetroChina (HKG:0875 or NYSE:PTR) got it’s A-share IPO in Oct. 2007. The expiration of the lockup period of some of the A-share allows institutions investors to sell their holding freely.

Money Flood from the North

The China government offers QDII so that China investors can invest in foreign capital. However, most of the QDII funds have drop below their initial price.
The new program that allows individual domestic investor to invest in the Hong Kong stock market directly never happened.






			NEXT - bubble return?

		Enjoy the Bubble and Prepare for Burst


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