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02/01/2006

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Date Posted: 22:57 16/05/2005



Bubble bubble

Is the Chinese economy about to burst?


IT IS ironic that in the wake of the nationwide crackdown, China's biggest gambling scam remains intact. We are talking, of course, about the country's stock markets.

To keep things brief, China's markets have essentially been set up to maximize the fund-raising abilities of lumbering state-owned companies, which still own the bulk of the share capital in the form of non-tradable stocks. The private investors have been losing money for years. As many as 90% of them actually made losses last year, despite the healthy 9.5% economic growth rate.

Last week, the China Securities Regulatory Commission (CSRC) announced a bold new move to sell off those non-tradable stocks, hoping that it would stimulate the market, which has fallen to a series of new six-year lows over the last few months. Unfortunately, investors weren't fooled by the plans, and the indices fell again. A mysterious rise in the value of the three pilot companies chosen to begin the experiment of divesting their state-owned stocks suggested that the government was attempting to prop them up.

In an attempt to stop a run on the markets, the government has ordered the media to shut up about the sequence of new lows and the feelings of ordinary investors. Instead, they report the Panglossian words of CSRC chairman, Shang Fulin, who said that everything was fine.

And so, one has to turn to the Chinese blogs to get some answers. Our correspondent says that a financial crisis is going to erupt at any time. The decision to let social security funds invest in the market is like throwing a stone into the sea. Many brokerages are on the verge of collapse, and the 'corrupt state-owned companies are still keeping themselves going by raising money on the stock market and borrowing money from the banks'.

Investors are starting to wise up to the true function of the Chinese stock market and will no longer invest. One brokerage, Southern Securities, is 8 billion RMB in debt, and will be taken over by the Bank of Construction, which is already saddled with massive amounts of bad debts. 'The state-owned banks are already essentially bankrupt,' says our correspondent, 'but linger on by relying on savings deposits.'

Added to all that are signs that the real estate bubble is about to burst, with underselling already underway in Shanghai. By now, most investors have lost hope in property and stock and are primed to take advantage of the revaluation of the RMB.

Without wishing to sound like gloom-mongering rentaquote Andy Xie, it does indeed seem as if a 'correction' is on the way. No government can manage the markets so precisely as to avoid economic downturns. With the Chinese government facing unprecedented structural problems, many of which have been obscured in recent years by the spectacular rates of economic growth, there is no reason to believe that they can achieve the sort of 'soft-landing' they have been talking about for the last year.


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