Yesterday’s 8.8% fall in the Shanghai stock market was the largest in 10 years – surpassed, somewhat ironically, by the 8.9% decline on February 18, 1997, the day former leader Deng Xiaoping died.
It was, after all, Deng’s vision and reforms that were initially responsible for the phenomenon we have now – a Chinese stock market that can move markets in other countries. Korea, Japan, Australia, Europe and the US all took a hit as a result of the sell-off in China.
Admittedly, the US decline – the worst since September 11 – was also driven by bad economic news at home.
It’s said that China’s fall was initiated by institutional investors cashing in on gains made in the last month, with the Monday highpoint – when the Shanghai Composite Index passed 3,000 for the first time – becoming Tuesday’s turning point.
Deutsche Bank cites rising CPI inflation, which increases the likelihood of an interest rate hike, and government moves to cut illegal fund flows into the A-share market as the key contributors.
But really this is the big correction everyone has been saying is due for several months now, when overvalued Chinese stocks return to something nearer the norm. No reason not to have nightmares about the state of the Chinese economy as a whole or to stop being bullish about the country’s near-term prospects.
As an afterthought, the Deutsche Bank report says: “Given that almost all the catalysts for the A-share market correction are domestic in nature, we do not think they should have a significant spill-over effect on markets in other countries. If it occurs, we consider it an over-reaction.”
China the global ripple-maker then, with the waves still to come.
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