Chinese stockmarket slump

Based on article from BBC, 28 February 2007

The Shanghai Composite Index fell by almost 9% yesterday, which the worst fall since February 1997 and has affected markets around the world. The Hong Kong and Hang Seng index closed 1.8% down and the Japanese Nikkei 225 index closed 0.5% down. Ripples have also been felt in London, Frankfurt and Paris.

This was amid rumours of a government crackdown on illegal trading and fears of inflation. There has been talk of interest rates being hiked in order to stoke rising consumer prices.

However, many analysts agree that the slump was down to speculation rather than a change in economic fundamentals. But shares in the Shanghai Composite Index were down 268.81 to 2771.791 after previously having broken the 3000 barrier on Monday. Passing the 3000 barrier would have chosen to take their profits after suggestions that the market had probably peaked. China's largest bank, Industrial and Commerical Bank of China fell by 8% as well as Baoshan, a steel producer dropping by 10%.

Is this a future trend or is it just a case of traders being cautious? Usually, when traders feel that the market has reached its peak, as mentioned before, they may start to pull out as there is not much potential for increased growth. If traders are also wary about the general state of the economy, then in the longer term, falling share prices could reflect weaker earnings by companies. In the case of the current drop, government intervention has played big role - as the economy has grown so rapidly, with signs of inflation on the horizon, the government is aware that too much can be dangerous. So they have already started to impose controls to prevent costs and prices rocketing sky high.

Links:
Q&A Will stockmarkets recover? - The BBC
Share sale knocks Chinese market - The BBC