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The Chinese market has dived by 17% so far this month. Johnny Reed in Shanghai analyses why it has been falling so dramatically while others worldwide are on the rise...
Grandma Lu retired to her bed on Monday night with a fever. Her family uncharitably described it as market-collapse flu rather than anything more serious. She's one of the dedicated army of private investors that trade daily in the Shanghai market. They may be small individually, but together they are a significant force and move prices.
August has been a trying month for her and her fellow punters. From a 15-month high of 3471 on 4 August, the benchmark Shanghai Composite index had collapsed to 2785 by yesterday.
And it probably has further to go. Although the Shanghai market doesn't really trade on fundamentals, the professional view is that it is still overvalued. Earnings growth prospects in the present economic climate do not justify current prices.
Until recently, investors really didn't mind. There was lots of liquidity around, and demand kept prices up. The index opened at about 1900 at the beginning of the year, and until this month had risen steadily. New issues restarted in June after a nine-month pause, and anyone lucky enough to get an allocation of shares made a healthy profit on early trading.
Unfortunately, the reason for all this was not the shining prospects of corporate China. Far from it, many sectors are still in serious trouble. It was the government's stimulus plan pumping liquidity into the system through encouraging bank lending. Of course, the banks didn't need much encouragement. It was almost like a return to the old days of the planned economy. In the first half of this year, they managed to lend more new money than was allocated for the whole year.
No doubt worthy companies and individuals were the recipients of these funds. But a lot turned round and dumped the money into property and the stock market. This has given the Government a thorny problem. It wants to keep consumer sentiment positive but doesn't want stimulus funds fuelling speculation.
And that is why the stock market has taken fright. Despite reassurance from the government that a relatively loose monetary policy will be maintained, recent statistics show lending growth declining dramatically in July and the CPI decline beginning to flatten out. Whatever the government says, it seems certain that there will be less liquidity in the system to keep the market fuelled.
Investors like Grandma Lu are unsure which way things will go, and many may take to their beds until they feel the bottom has been reached. Some say this will be at a level of around 2500. The more honest would admit they haven't a clue.
Millionaire Yang has a more positive approach. He is something of a legend in Shanghai market circles. A former factory worker, he earned his epithet from successful investing during the early days of the stock market in the 1990s. His blog last week gave his support level at around 3100, which was where the market stood at the time. Since then, it has fallen 10%, so he may be revising his opinion.
