Chinese Stocks Slid 6.5%

Based on the benchmark Shanghai Composite Index, Chinese stocks slid by 6.5% yesterday morning. The last time China’s shares went into a mini-slump of this magnitude, the rest of the world followed. But not this time. The markets pretty much shrugged it all off yesterday.

Why? (Maybe I should be asking: Why not?)

Probably one of the main reasons yesterday’s little hiccup in China was largely ignored by the wider markets is because there was a very good reason for stocks to fall. No one quite knew why the 9% plunge back in February actually happened, so investors immediately panicked that the big sell-off they’d all been anticipating was suddenly happening.

This time it’s obvious why Chinese stocks fell, so no one feels the need to panic. It’s nothing to do with the yen carry trade, or global inflationary pressures, or geopolitical disaster. The Chinese government simply trebled stamp duty overnight. That's it. Period. However, it’s still much lower than it is in Singapore, rising from 0.1% to 0.3%, compared to our 0.5%. But even so, when your trading costs jump like that, even the most ardent speculator has to pause to think for a moment.

Of course, the fact that the Chinese market has already risen by more than 50% this year means the speculators probably won’t stop to think for long. After all, who cares about 0.3% stamp duty when you’ll probably see a return 100 times that size inside your first six months of trading? At least if past performance is anything to go by.

So this is another of those moves by the Chinese government which says “we want everyone to know that we’re aware of this stock market bubble, but we don’t actually want it to burst.” And it’s not every day as a government that you get the chance to triple a tax & can still feel confident that people will happily pay it without rioting in the streets. After all, this is a bubble, so it’s the only responsible thing for the authorities to do.

Besides, they’re probably feeling a little bit cheated by the stock market boom. A World Bank report has found that the Chinese government could have got a lot more for all those state-run companies that have listed on the stock market. The World Bank reckons Beijing has lost nearly $10bn this year alone, because it has priced its assets too conservatively when they float.

For example, on its first day of trading, government-controlled lender Bank of Communications saw its share price jump by 70%, suggesting that its initial public offering (IPO) price could have been pitched at least a little bit higher without crimping investor demand. Of course, you could argue that maybe the Chinese have a better idea of exactly how much their banks are worth & are just glad to have them off their hands. We’ll just have to wait and see how it all pans out when the stock bubble does finally pop.

So all eyes are now focusing on Friday's opening. If market show further signs of weakness by lunch, please wear your seat belt. Your stomach might churn come Monday. Good luck to all.

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