The “brilliant” Shanghai stock market

If you were concerned (like many analysts) that the Shanghai stock market — which doubled last year and is up 50% this year — is in a bubble, you should now calm down. The Peoples Daily reports on the “brilliant policy decisions” that have led to the current performance of the Shanghai market:

Zhou Zhengqing, a member of the NPC Standing Committee, vice chairman of the Financial and Economic Committee and former chairman of the China Securities Regulatory Commission…According to Zhou, there is no serious bubble in China’s stock market…Since June 2001, China’s capital market has been stagnant. This is not normal. According to Zhou, there are multiple reasons for this. One is a misunderstanding of the development of capital markets. Faulty thinking is common in society…

“The major shifts and changes that occurred in 2006 are the result of efforts to improve and expand reforms. This has not been easy; we must cherish the situation we now have,” said Zhou Zhengqing. “There were five main factors that contributed to last year’s turning point.”

— Firstly, the CPC Central Committee and the State Council have attached great importance to the development of the capital market and made important strategic plans and brilliant policy decisions.

— Secondly, the improved legal environment is conducive to the development of the capital market.

— Thirdly, by completing equity division reforms, China solved some of its major lingering problems, which will have a long-term impact on the healthy development of China’s capital market. Moreover, shareholders can no longer hold both tradable and non-tradable shares or share the same equity property, strengthening the basic mechanism.

— Fourthly, the sustained, rapid and healthy development of the national economy created a favorable external environment for the capital market. “The money market in particular was more liquid, which helped ease the shortage of funds in the capital market that has been a problem for the last two years.

— Meanwhile, investor’s growing demands have raised the objective requirements for the development of the capital market,” said Zhou.

There you have it: brilliant policy decisions by government officials and a shortage of stock to fill “investor’s growing demands.” Nothing to worry about there. So if it concerned you that Shanghai was trading at a p/e of nearly 40x or so, stop worrying. Everything will be just fine. After all, as the Peoples Daily said, “faulty thinking is common in society.”

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