On February 27, stock prices tumbled as much as 9 percent in both the Shanghai and Shenzhen stock markets, causing loses of over 1 trillion yuan. It was the biggest single-day undersell for the Chinese market in ten years. The incident also had a ripple effect on economies around the world. The United States' Dow Jones index plunged 416.02 points and the London's FTSE fell 148.6 points.
Sound of Hope interviewed the Chinese political and economical commentator Mr. Wu Fan and the vice-chairman of the Pan America Investment Group, commentator William F. Mei. Both men commented on China's market crash and shared their speculations about the underlying causes.
Wu stated that China's stock market plunge was inevitable. He believes that there has always been a stock market bubble in China, especially last year, when the market increased by 130 percent. He considered it a very dangerous situation, since the funds were national, not foreign.
Wu explained that in mainland China, people are not investing rationally. He said, "It is completely crazy now. They sell houses and cars to get a loan to buy stocks. Some Chinese banks are even moving internal government funds to purchase stocks. Some plans of the Chinese regime even suggest investing 10 percent of the social security fund into stocks instead of the 5 percent that is now invested."
Wu added that the stock market would not be able to take care of that much money. Stock market performance is based on the idea that out of hundreds of stocks, tens of hundreds of stocks, every single one is making a profit. In addition, the stock market's performance should be completely publicized so that the people can make educated decisions. Yet, these two factors do not exist in China.
For Mr. Mei, it is a question of market stability and investor confidence. "One reason the stock market fell is that Chinese people do not have much confidence in it, so they won't make any long-term investments. Investors jump in and out of the market—it is highly speculative," he said.
Mei believes another factor is the yuan's recent increase in value, which caused great amounts of overseas investment funds to flow into mainland China. The investors are waiting for the value of the yuan to increase and to earn a profit on their investment.
Some analysts have pointed out that investors are worried the Chinese communist regime may put further limitations on investment to keep the economy from overheating.
"Even the Chinese Communist Party (CCP) realizes that the stock market is in a dangerous position," said Wu. "Therefore, they feel the need to suppress it, just like they used to suppress the real estate market. They call this adjustment and control. They do this in several ways: Increasing bank interest or setting new rules like taxing all money made from the stock market."
In fact, there have been signs that China's stock market was going to fall. The market was on the rise throughout 2006, entirely due to manipulation by the CCP and an influx of hot money. The market became crazier since the beginning of 2007, leading to an increase in Chinese investors. Huge amounts of money have been dumped into the stock market.
With over 1 trillion yuan lost, the crash could have effects on the Chinese economy and the entire world. On March 1, the New York Stock Exchange fell 500 points and the Dow Jones Industrial Average fell 416 points at closing, with the markets in England, France, Japan and Germany quickly following suit. Due to foreign banks investing heavily in China's banking system, all of these economies have become connected.
Wu said, "It affects us all. Therefore, I think the crash is actually a good thing, because it exposes the 'bubbles' of the Chinese economy."
Some analysts have pointed out that the primary cause for the Chinese stock market crash is the sudden increase in the pressure of fund redemption. The fund companies could only sell "heavyweight" stocks that had already surged in response to the redemption wave. The tumbling price of the fund triggered a panicky sell-off in the market.
Wu feels that the U.S. and global markets will not completely follow China's trend since China's GDP accounts for only about 5 percent of the world total.
Wu said, "The United States makes up 20 percent, while all other Western countries combined account for over 50 percent of the world's total GDP. Hence, the fluctuation of China's bubble economy cannot affect the world economy over the long term."
Although some have come to see China as an irreplaceable source of cheap manufacturing for everyday goods, but if China were to suddenly disappear from the scene, the slack could be easily taken up by other producing nations.
"Soon people would find a substitute manufacturer," says Wu. "They may find one in India, Vietnam, or Taiwan. China is not irreplaceable, it is only that prices might become slightly higher."
Financial observers with their eye on China believe that the root cause of the current market slump is the early accumulation of economic "bubbles" and excessive overdraft. Added to this are the inflated stock prices of publicly traded companies and commodities due to artificial manipulation.
[Note]: China's stock market rose insanely at the beginning of 2007, with the Shanghai index getting close to 3,000 points. China went through another round of "grand" speculation. Statistics showed that in the first 10 days of 2007, China's stock market had an increase of 1,291,677 new accounts, with an average of 129,168 new accounts daily, which broke the record. Data from January 23 showed that new accounts for A shares, B shares and funds reached 80,934,100. It was the first time that the total number of stock investors in China surpassed that of the United States.
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