China Law Blog

Everybody who had been paying attention saw the China correction coming. . . with most major investment banks (non-Chinese) warning of overheating. The surprise was the rest of the world's reaction. Since when do traders in NY, London, Frankfurt or Tokyo care about A-Shares?

And Chinese traders never care about ther rest of the global equity markets. China was the only Asian market that reacted positively when the Norks had the nuke test. Better said, they ignored it and reacted to domestic concerns.

The markets in China and elsewhere have been two separate worlds for as long as they have existed (three separate worlds if you pay attention to New Zealand, four if you include Zimbabwe, five if you count Sri Lanka, etc...). Basically China has never been a big part of the broad global system.

As for why it happened, at least domestically, there was a basic cause. Stratfor summarized it well:
"For the past few months, the government has been working to drive down this speculative investing. On Feb. 26, China's State Council launched a new "special task force" that accurately could be referred to as the "get-those-idiots-to-stop-borrowing-to-gamble-on-the-stock-exchanges" team. Its express goal is to get the Chinese domestic security brokers to lay off such speculative decision-making, while also putting a crimp in the source of the subsidized capital."

But please don't call this a 'Black Tuesday.' It does not compare to 1929. Try 'Red Tuesday.'

(Or at least I hope it doesn't compare to '29... I have always enjoyed Andy Xie's talk of a global asset price bubble, but it never really seemed like one that would burst in a dramatic way.)

Great post!

dont we all love the black tuesday? haha. very awesome display of uncertainty, being scared and crapping your pants across the Atlantic and pacific. awesome.

I love it. The black tuesday has showed us a lot about everyone is just scared of China. Talk about extensive speculation, uncertainty and crapping of pants across 4 continents.

haha.

I don't believe the market events in the last two days can even be considered a sputter in the economic engine. To me, swings in the market like this are more of a reflection of the irrational aspects of traders trying to just keep pace. A few people talk about over-valuation. A few prominent people start selling. And, before you know it, everyone thinks their on to something and rushes to sell, get out, and dump it. China and America are going to continue plugging away and steadily grow their business together because there is so much growth potential in the Pac-Rim region over the next 30-50 years and there are too many people who will benefit from that. Personally, I think the bigger challenges--energy, environment, currency valuation, etc. will slowly become more prevalent and threatening, but we will likewise have more time to prevent, deter, and deal with them. Clearly, I fall on the optimistic side of the spectrum. But if Im wrong, then Dan, baiju might be the only thing that works.

While this may have been a blip, weaknesses were exposed.

1. The china drop was caused by one of two (or both) rumors: a capital gains tax (not a big deal, investors will get out until after the tax is enacted, then get back in) and a crackdown on illegal share trading (a big deal).

2. The US drop was caused in part by the china drop and also a big dip in durable goods...the necessary things that corporations buy like IT.
The US drop also exposed the fact that the SEC removed post-Great Depression guards to allow hedge funds, derivatives traders and speculators to make more money.

Everyone knows that the US lending market is rotten to the core (many lenders are failing and big lenders are using cash savings to cover losses) and new homes are sitting idle (construction and home furnishings employment).

The Q1 reports will be colorful.

Also, word is getting out about Tibet's potential mineral wealth, just the possibility is enough to cripple the international commodities market.

Many of the shares on the Shanghai markets are SOEs or quasi state-owned, so in a way they do correlate -- but only with the most backwards, under-performing, distressed portion of the Chinese economy. It's like a US stock index made up of Amtrack, the Department of Motor Vehicles and the Board of Education. They handle lots of cash & assets -- but aren't exactly the sharpest tools in the shed. The real question isn't why share prices fell -- but why they moved so high in first place.

Want to make a billion bucks quick? How about starting a rumour that China is going to sell xxx from its $1 trillion foreign reserves holdings and switch to yyy instead? The last I heard, George Soros is still alive and kicking.

"The real question isn't why share prices fell -- but why they moved so high in first place."

The Shanghai and Shenzhen indexes moved high because Beijing is allowing individual Chinese to enter the market with small purchases, their buying drove the market higher over the last year and now they are learning about "volatility".

Myrick (Asia Pundit) --

Thanks for checking in. I concur.

Chris --

Thank you very much.

Mike --

Real people lost real money that day. There is humour and there is gloating.

Audall--

I concur.

nanheyangrouchuan --

So you say.

I do agree that China stock prices got too high.