Shanghai Down, Elsewhere Up!

Shanghai's stock market tumbled 8.3% on Monday, & that fall came on top of the 6.5% one-day drop we saw last Wednesday. The reason for the slide: The Chinese Ministry of Finance decided to raise the stamp duty on stock transactions from 0.1% to 0.3%.

Now, when the market dipped last week, many investors & readers wanted to know if this was the start of a new painful bear market for Chinese stocks. My thoughts: Probably not. Even though we saw another wave of selling today (Tuesday), I still believe that this is not the end of the boom in the Chinese economy or the Chinese stock market. I want to tell you 3 reasons why Shanghai's drop is just a bump in the road.

First, the increase from 0.1% to 0.3% is really peanuts, not coconut. I doubt that an extra two-tenths of a percent is going to have any significant long-term impact. The Chinese government has been imposing a stamp duty on stock trades since 1990. In the beginning it was 0.6%. Since then, the rate has been adjusted up & down several times. For example, in 2005 it was halved from 0.2% to 0.1% to boost the then-depressed market.

The only thing this new inconsequential tax will do, if anything, is increase the period Chinese investors hold on to stocks. It certainly won't chase them out of the market. The increase to 0.3% will be as effective as dampening the red-hot Chinese stock market as a pair of chopsticks would be at damming the mighty Yangtze River.

Second, you should put Shanghai's recent correction in the proper context. Prior to last Wednesday's drop, China's market had surged about 62% for the year on top of a 130% gain in 2006. Any market that has moved that far is not only entitled to, but desperately needs, a profit-taking breather.

In fact, this might have been the most anticipated correction I can ever recall. For the last few months, all the major media and headline-hungry pundits have been talking about the Chinese "bubble." Even Uncle Greenspan chimed in with a strong warning. Of the Chinese stock market, he said, "It is clearly unsustainable. There's going to be a dramatic contraction at some point." Now is that point lah.

In fact, the time to really get worried about a market is not when everybody is yelling "fire," but when everybody expects stocks to rise in a straight line. Oh, did I mention that even after both big-drop days, the Shanghai Composite was still up 37% for the year? Crazy isn’t it?

Third, unlike February 06 when the last China correction sparked a global sell-off, markets around the world have shrugged off the latest drops in Shanghai. After last Wednesday's Shanghai correction, the Dow Jones Industrial Average lost some ground then went on a "what-me-worry" rally of 111 points to a new all-time high.

And yesterday, even though Shanghai was dropping, Asian markets like Japan & Hong Kong finished in positive territory. U.S. markets were barely changed. So, China may have sneezed, but the rest of the world doesn't seem to be catching a cold.

Bottom line: Everything I read, heard & saw told me that the great economic boom is still happening. In fact, I'm as enthusiastic as ever.

But don't take my word for it. Other major agencies agree that China still looks strong. The World Bank & Moody's Investors Service both gave stamps of approval on China. The World Bank raised its 2007 forecast for Chinese economic growth from 9.6% to 10.4%, which would be the fourth straight year that China's gross domestic product rises faster than 10%.

Meanwhile, Moody's Investors Service put its A2 rating on Chinese government bonds on credit watch for a possible upgrade. The ratings agency praised China's strong external payments position, continued success in reform, & favorable fiscal trends. See, that's what happens to countries that spend less than they make.

So, naturally, you will ask, what must I do? Well, find ways to invest in Asia as fast as possible! The last time Chinese stocks got clobbered, it was a great buying opportunity. I feel the same way about this most recent correction. If you want to add some Asian spice to your portfolio, now may be another good time, & you have a lot choices to do it.

Fact is: China isn't the only booming economy in Asia. Some of the very best growth stories are found in neighboring countries, like Taiwan, India, & South Korea. Singapore & Malaysia are not too bad either, so is Japan.

So, till the next visible sign of market cracking, stay sane, stay safe, but most important, stay solvent. And don't say I didn't say hor.