The Bear is Back as Chinese Stocks Plunge

Posted by: Bruce Einhorn on August 31, 2009

It’s been a month to forget for Chinese investors, and the last day of August was the worst of all. The Shanghai benchmark index plunged 6.7% today, its worst one-day fall in over a year. Since hitting a high of 3478 in early August, the once-torrid Shanghai market has fallen 23%, which means China officially is in a bear market.

Which might seem a bit strange, given all the talk about the success of the $586 billion stimulus plan for the Chinese economy. Now, though, more investors are having second thoughts as they worry about asset bubbles caused by lenient lending policies at the state-owned banks. For instance, here’ a good take on the situation from China Stakes, an interesting Chinese financial news site:

The present bull round in China this year is almost completely driven by liquidity instead of any real improvement in the real economy. The recent market “correction” stems from the exit of credit funds with which to speculate. With the gradual reduction of the stimulus policies and the increasingly serious threat to the sustainability of economic recovery from the vast production surpluses they brought on, the stock market may well “correct” downward even further if the bank lending continues to ebb.

China Stakes goes on to cite research by a Bank of China analyst published in Caijing (one of China’s most respected business magazines). According to this analyst, Shi Lei, there’s been a $175 billion surge of easy money that’s gone into China’s stock and property markets rather than into fixed asset investments. Says China Stakes, that’s “equivalent to 26% of the turnover during the first six months in the Shanghai and Shenzhen stock markets this year, and 76% of the total turnover in the national real estate market.” Read the rest of the China Stakes analysis here.