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China stock crash tells policy shift
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17:22, August 17, 2009

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By Li Hong, People's Daily Online

It's like the 2008 American financial meltdown having a re-run in China. For stock investors staring at the curves tracking Shanghai and Shenzhen trading houses, the market in the past two weeks went unbelievably bearish, reflecting what the word had seen the Wall Street's free fall from September 2008 to March 2009.

Then came the "Black Monday" on August 17, when the Shanghai composite stock index crashed by 5.8 percent, and Shenzhen index by 6.7 percent, with the prices of more than 300 listed companies diving by 10 percent, the floor for a single day's decline. Within two weeks, the market has shrunk by 18 percent, evaporating trillions of yuan.

The crash happened in the backdrop that the major economies in the United States and Europe are stabilizing, proportionately bouncing equity markets and public confidence there, and ironically, both Chinese and alien economists praise Beijing's massive pump-priming efforts and predicting Chinese economy to power past 2009 with an estimated growth rate of at least eight percent. Many are even singing the high note of China to lead the world out of the contraction.

How is the gap between the "real economy" and the stock market? Some analysts now question the authenticity of government statistics, which puts the country's 2nd quarter GDP growth at 7.9 percent, a world record. Others believe that the two went disparate because of over-exuberance of stock investors in the past months, who have created Greenspan-style equity bubbles in China.

The real culprit leading to the crash is, perhaps, the global financial crisis. To save the Chinese economy from a worldwide "cardiac arrest" triggered last September by the downfall of Lehmen Brothers, Beijing has implemented a pro-active fiscal spending and bank lending policy. To jumpstart a sliding economy, all of a sudden, the sluice to low-cost borrowings was lifted. The People's Bank of China, the central bank, counted that more than seven trillion yuan excessive credit was issued to "businesses" in the first half of the year.

Buoyed by the flooding of loans and liquidity, the stock markets started a bullish run at the end of 2008. Incessant reductions of interest rates by the central bank ever since have caused a rising withdrawal of the deposit accounts. The transfer of deposit money from bank savings to the stock markets, or to the purchase of mutual funds, has subsequently created a galloping stock market. In 10 months, the Shanghai index nearly doubled.

However, there is a price for the over-exuberance. As China's economy is warming and heating, fueled by a huge fiscal stimulus and record-high bank lending, and especially, as the economies in the United States, Europe and elsewhere, stabilizes and bounce back to a quick recovery, stock investors get unnerved, for the apparent policy change in the coming: the central bank will soon rein in credit to curb inflation.

As the investors become fragile and precarious each passing day, the shoe dropped finally in late July. The People's Bank of China, in its half-year financial policy review, wrote that it would begin "fine-tune" the previous "loose" lending policy. On July 29, the Shanghai stock market nosedived by as much as 272 points. It hasn't come back.

And, the heightened-pace of new IPOs authorized by the country's securities regulator since June, and the wild rumor that the Ministry of Finance will raise stock-trading tariffs, which till today is not denied by the ministry, nailed the coffin for all the investors.

The article represents the author's view only. It does not represent opinions of People's Daily or People's Daily Online.

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