The China Economics blog, among others, predicted the decline of the Shanghai market that has taken place in the last six months. There have been a lot of shenanigans in the Shanghai market, that is true, but markets also fundamentally look ahead to future economic performance, perhaps six to nine months down the road. The NYT has more on the shenanigans:

the government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors’ anger. “Actually there are a lot of complaints, but the Chinese media can’t report this,” says Mr. Guan, the former real estate company owner.

Now, in the brokerage house corridors — corridors of pain — one can hear complaints about all the market flaws: the government doesn’t regulate the stock market and it participates in it by allowing mostly big state-owned companies to go public. There are also complaints about insider trading, stock manipulation, and big investors with government connections, pumping and dumping stocks on small investors…

“It’s a deformed market, an unhealthy market,” Mr. Guan says. “We’ve always had long bear markets and short bull markets…Look,” he said, “it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500.”

Clearly there has been some crazy speculation at Shanghai 4000, and 5000, and 6000. And there’s clearly been monkey business going on, with the pump and dump operations and no doubt much worse. But we are beginning to see a good many signs, mostly anecdotal and suggestive thus far, of a coming significant slowdown in China’s economy.

If that should come to pass, with the cascading effects of increased scrutiny on the details of China’s economy, caution is in order. (Investors Business Daily has editorialized that China’s basic economic statistics are a scam.) In such an environment, some of the commodities related to growth, like oil, which have been on speculative steroids for some time (and giving off classic warning signs), may experience a reversal that seems largely unanticipated by markets at this time. Can’t happen, you say? Perhaps. But how many people understood the magnitude and impact of the subprime problem at the beginning of last year? Recessions happen, bubbles burst, discontinuities develop — and so many times they seem to appear as a great surprise.

In China, interest rates are up, so is inflation, bad debts are already high, the yuan has been revalued from 8.3 to about 7.0, exporters are facing lower sales increases (in a country 70% dependent on exports for growth) plus squeezed profit margins, some factories are closing, and these things translate into lower real FDI, itself a powerful engine of China’s growth. Add to that a limited range of monetary options (with inflation 7-10% and M2 growth 16+%) to spur growth, and China’s slowdown might be more serious than the world anticipates at this time. We’ll see.

This entry was posted on Friday, April 4th, 2008 at 5:17 pm and is filed under China, General, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.