Shanghai Stocks: Bear in a China shop

Are you in the Chinese stock market? No, this isn’t a reprint of the post from last month. We ask because yesterday, both the Shanghai and Shenzhen exchanges dropped about nine percent, registering their biggest decline in a decade, surpassed only by the sell off the day after late reformist leader Deng Xiaoping died in 1997.

A month ago, Shanghaiist told you about the national mania that is the local stock market. While both the Shanghai and Shenzhen exchanges did have a mini-correction of about 10 percent the week following our post (apparently when Shanghaiist speaks, the street listens), stock indexes have since rallied to all time highs right before the lunar new year. That is until yesterday’s carnage. No news in particular was given for the sell-off, though rumors of tighter government control and foreign funds bailing floated during the trading day.

In years past, local markets’ volatility never went beyond China’s borders, but yesterday’s meltdown sparked a massive global retreat, from Moscow to London to New York. The Dow Jones Industrial Average shed 416 points and the Nasdaq fell nearly 97, biggest declines for both indexes since the 9/11 terrorist attack.

So, what is a Shanghaiist reader to do? If you are among the few that actually own shares on the local exchanges, you should be worried. After the drubbing yesterday, local financial publications and surveys of individual investors are unanimous in calling this a buying opportunity, believing the long term upward momentum is still intact. This level of unwavering bullishness after a big sells-off is rather scary from a contrarian perspective (a belief that consensus is usually wrong). In fact, current investment sentiment in China closely mirrors that in the US during the initial phase of market downturn in 2000. This Shanghaiist thinks that there is more downside to come.

As for the majority of our readers who are shareholders in Western bourses, well, just relax. The correction in your local markets is more of an emotional response, rather than any fundamental structural deterioration. Fear of a dramatic slowdown in China’s economy is overblown. The health and the growth prospect of China’s economy has never correlated with the performance of its domestic stock indexes. China’s GDP has grown 10 percent per annum for the past three decades, yet other than a brief hurrah during the mid 90s, both Shanghai and Shenzhen have done rather poorly in the face of such torrid and sustained growth. And the 160 percent surge last year wasn’t attributable to any particular economic event, either. So, we’ll tell you the same thing we told you last time around. Go out, buy yourself a cold beer and have a nice day.

For more information, read the New York Times, or the Shanghai Daily.

P.S. The Shanghai Composite Index is up a whopping 100 points at 2:35 pm, erasing nearly 40 percent of the loss from yesterday. Yeah, there's more downside to come...