Big Swing in Shanghai Market

After trading up exuberantly by 5.24% Wednesday the Shanghai market was hit pretty hard with panic selling, to drop 6.55%.  Once again smart investors used the strength in the market to unload their positions, overwhelming a rally early in the morning. 

It is not completely clear why the panic selling took place Thursday.  PBoC Governor Zhou said yesterday that "tackling inflation remains the most important task", and the fear that the government would rather squeeze the economy than let inflation rise further could have hurt sentiment.  There are also rumors raging about a new investigation into illegal behavior among some major players in the market, nervousness about global conditions, and the inevitable worry about whether or not the government has any tricks left up its sleeve to halt the decline.  My student Shang Ning tells me that the internet is buzzing with angry denunciations of the government for not doing anything to help the market, but I don't think there is a whole lot left they can do.  We are now well under the 3000 level, below which, as everyone knew, the government would never let it fall.

I don't know much about the rumors on the investigation, but a few hours after I was told about those rumors I got a very disapponted email from another of my Peking University students saying that he had heard that a former senior CSRC official was arrested because of inside information and bribe-taking.  He also told me that two other very senior officials were also under investigation, and forbidden to go abroad.  I won't mention any of their names because I have no idea if these rumors are true, but they are shockingly senior officials.  At any rate whether or not they are true these rumors seem to be part of the reason for today's awful markets.

More interesting to me then the carnage in the market was a report just issued by the World Bank.  According to Bloomberg's comments on the report, "China's monetary policy may be overwhelmed by inflows of speculative capital if it doesn't allow greater exchange-rate flexibility, the World Bank said."

I would say China's monetary policy has already been overwhelmed, and unlike with other developing countries whose policies have been undermined by speculative capital flows, this time these flows are large not just relative to the country under siege but to the global economy.  This is to me one of the most important stories in the world right now, and I plan to post a rather longish piece on the subject tomorrow.  Because I have been traveling for the past two days, and will continue until next Wednesday, my posts have been less complete than I would have liked.  There are an awful lot of things happening in China and the world worth discussing.  I promise more later.

Comments

[terryliang]

It's interest why China's monetary policy become overwhelmed by inflows of speculative capital while the stock fall sharply and price of real estate freeze or decline? Where have the money gone?

[huangthomas]

The officials are talking about organizing a mass movement similar in scale during Korean war, cultural revolution or when Chinese Embassy was bombed in former Yugoslavia by American missiles. Use a political movement to "save" the stock market???

The spread (premium) between A- and H-share is narrowing. May be at some point in time between now and Olympic game, the hot money, estimated to be $5-600 billion, may decide to enter and lift the stock market. That may be the wishes of the government.

[huangthomas]

Chinese have planned to use Olympic game to stage a political extravaganza - The Emerging China. So far things, one after another, have been depressing: worst snow storm during Chinese New Year, Tibetan unrest with loss of human life, Olympic torch relay fiasco in the West, Sichuan earth quake, which killed 69,000 people and left 5 millions homeless, major flood, and a falling stock market. What can government do to cheer up and lift the spirit of Chinese? I can only think of stock market! But, how?

[johnthebear]

Easy, just raise the price of gas on par with America, that should make the market leap with joy!

The China Oil Companies will leap in praise of the government! Stocks will will go up in China, and the FXI stock, making a great holiday spirit suitable for the Olympics.

The only problem I can see is the Democrats in our Congress will try to figure a way to tax China's windfall Profits!

How is that for an answer to your question Mr. huangthomas?