Shanghai’s Stock Market Is A Gamble
China’s stock market is burning hot but it’s also unregulated. How bad is the situation?
Shanghai Stock Exchange’s share prices have increased almost 200% since the start of 2006, yet there’s less hubbub in the exchange’s lobby. Its stillness refutes the fact it is the world’s hottest stock exchange. To note, Shanghai has a capitalization exceeding $2 trillion but bears little semblance to the developed world’s exchanges.
On Feb. 27, China’s Shanghai exchange got the world’s attention when it dropped nine percent and world stocks briefly followed. The Dow declined over 400 points, but soon recovered. Meanwhile, the latest drop on the Shanghai exchange annoyed Chinese investors, who have expected only upward thrust. They dismissed government attempts to cool the hot stock market with interest rate increases and taxes on speculative stock sales.
The realm mirrors different stock trading education. What’s obvious to economists is that China’s flourishing stock exchanges operate like casinos, both in Shanghai and in the southern city of Shenzhen, where smaller companies are listed. ”Deep in the heart, investors know it is a casino. It is a place where you can become a millionaire overnight,” said Fan Li, 31, a former journalist turned business consultant in Shanghai.
The number of Chinese who are playing the stock market could be between 35 million and 50 million, a huge slice but only a small fraction of China’s population, which exceeds 1.3 billion. ”It has very little foundation in the real economy,” said Albert Keidel, a former top U.S. Treasury Department expert on China who’s now a senior associate at the Carnegie Endowment for International Peace in Washington.
The bigger risk is political, Keidel warned. The government is trying to avoid a bubble burst ”that would have political implications with a lot of people losing wealth,” Keidel added. “If you let the air out of the bubble this way, it can lend itself to political stability, which is what they’re concerned with.”
