China’s Stock Market Trading Surpass All of Asia’s

The growth of capitalism in Communist China continues apace. The value of the stocks traded on the Shanghai and Shenzhen exchanges on Wednesday reached a combined value of Rmb376.9 billion (roughly £24.6 billion). This is more than the value of all stocks traded throughout the rest of Asia, and it’s bigger than the amount traded in London. Bubbles don’t happen under communism, so the Chinese may be cruising for a disappointment.

According to the Financial Times, Wednesday’s “figure of $49bn was nearly double Japan’s $26.9bn turnover, and triple the $16.5bn combined trading volume of Australia, Hong Kong, Thailand, Singapore, Malaysia, Korea, India, Taiwan, Indonesia, New Zealand and Vietnam. It was still less than half Tuesday’s $122bn volume in the US, but well above London’s £14.7bn ($29.4bn) on the same day.” The FT notes that, since day-trading is not allowed on Chinese exchanges, the figure is all the more impressive.

That said, the Chinese markets aren’t the richest when one measures market capitalization. The FT also reported, “While the Chinese market is now the second-largest in terms of turnover, it is still less than half the size of Japan’s in terms of market capitalisation, with Shenzhen and Shanghai boasting a combined $2,200bn compared to Japan’s $4,700bn, the UK’s near-$4,000bn and the US’s $16,500bn.” Readers of the FT tend to be older Britons for whom “thousand million” is a more comfortable term for the figure than “trillion.”

With inflation in China officially above 3%, bank accounts and bonds are offering negative real interest rates. Consequently, the Rmb20 trillion sitting in personal accounts is likely to start migrating to the stock markets. Naturally, this will boost prices in the short- to mid-term. However, when major flows of money like this start, there is little to distinguish good stock investments from bad ones. So long as the market rises, everybody’s happy. When profit-taking starts, then the trouble begins.

In addition to the inflation in stock prices (too much money chasing too few shares), the Chinese have an undervalued currency. This is a potential double whammy. A stock market bubble coupled with a currency that isn’t properly valued is a recipe for a lost decade economically – see Japan in 1993 for how that feels. One wishes the Chinese better policy implementation than that, but there’s no reason to believe they’ll get it.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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