Postings and assignments for students in Econ 3334 at UH
Friday, April 18, 2008
Chinese Stock Market Crashing
The Chinese stock market is plunging. Given our discussion of financial markets, what might account for such a drop in value? (Recall that what matters are profits, the real interest rate, and the growth rate).
15 comments:
Anonymous
said...
China is going back to its equilibrium after months of prosperity. Thanks to the sub prime mortgage crisis, China was able to gain new economic growth at a time when other developing countries would have been hurting. This new growth would only be a temporary one and would sink right back to where it started. In May 2007, the government increased the “tax on share trading.” The government’s goal was to help slow down the market. The prices after the tax increase fluctuated up and down. The final result was that the shares prices had dropped and would keep dropping.
Another analyst believes that the fear of inflation would warrant the change from a booming period to a diminishing one. This fear of inflation caused the People’s Bank of China to decrease the money supply, by “increasing the reserve requirement and also increasing the lending rate.” The drop in the money supply would have caused there to be less money for investment in the Chinese market. Since there is less money to be lent out for investment, the rate at which the banks give it out would have gone up as well. This would have lowered investment in China.
The People’s Bank of China did cause the prices to drop but the actions they did were too much and made prices drop “below their offer prices” This has caused some businesses to lose some future investment and is bad side effect of the drop. Even with the drop in growth in China, there is still good news. The future speculation is in favor of the Chinese markets and this alone means that the markets will grow again.
One thing that was discussed in class was inflation. This article helps prove to show how much of a concern it is for economies out there. If inflation grows to big, then it will be hard for a consumer to tell when it is appropriate to buy something due to how unstable the market is. In order for the market to be stable prices of all goods must also remain stable.
Note* I am an idiot and didn't realize what I was supposed to be doing. This is my first attempt at the comments thing and from how I feel about it this one is utter trash. I figured it out on my second attempt.
The U.S. is not the only country with crashing stock prices. China has seen significant shares in its countries stock markets decline rapidly over the past year, reverting back to norms from 2007. The Shanghai market has dropped some 46% to levels that have not been seen for quite some time. Analysts speculate that the cause of the change is the pessimistic outlook on the market until the government invokes new policy changes.
The government concedes that the cause of the sharp decline in the markets is because of the rising inflation over the last several years that has ballooned to an annual 8% increase. Companies that have floated, or allowed their stocks to be sold to the public, have seen their prices fall dramatically to below their initial offering price. This certainly does not bode well for the outlook of these Chinese markets. Inflationary prices and speculative investment equate to worrisome consumers, and without the purchasing power of these consumers the markets will struggle.
However, this isn't to say some traders are not optimistic. Shares are still being traded at high volumes and many believe that a positive first quarter could pull the market out of its current rut. Personally, I feel that this is only a small picture that helps complete the puzzle of the world economic state today. With so many countries struggling or in a recession, China is just one of many who may endure a struggling economy for the next few years.
This article discusses how the prices of Chinese stocks have performed a one hundred and eighty degree turn and have now dramatically dropped in the past six months. The Chinese stock market in Shanghai is now down nearly 46 percent from their all time highs. Experts believe that the one reason for the drop in the stock market due to the “pessimistic atmosphere” surrounding the market until the government can successful supply investors with proper policy changes. The government feels that the recent slope in the market is due to the inflation levels, which have continued to rise sharply for the past several years. Many investors are fearful of the Chinese stock because many companies are now well below their initial prices. This is causing many of the Chinese consumers to become fearful of the stability of the Chinese companies and hesitant about investing.
People believe that there are reasons for the declines in stock prices. Some feel that the government does not want the Chinese economy to “overheat” with the high inflation and the sharp increase in the consumer prices. The Chinese central bank is working hard to find ways to minimize the effects from inflation. However, stock prices may even be dropped further because “there are still billions of non-tradable shares locked up from earlier flotations that will be released on to the market in the second half of this year.” Nonetheless, some trades have managed to remain optimistic throughout this entire stock market fall. Many traders are continuing to work to keep the market going. They feel that the Chinese stock market just needs to see a peak in inflation and have one healthy quarter to “boost investor sentiment” and get the stock market back up. I believe that China is going to be able to get their stock market back to respectable levels. They are not the only country experiencing problems in their market. I feel that many United States companies are going to help china because of the large role that that China plays in the United States economy. Also, I feel that China is still a developing country and it is going to take some time till they have all of the proper policy in place and they are able to stabilize the markets and the economy. I have no doubt that this will happen, and when it does, China will be competing with the United States to be the world superpower.
According to Financial Times, the Shenghai stock market has seen a weird turn of events over the last year. In 2007, the Shenghai market achieved a record high and dominated Asia’s exchanges. This surge was created by the high opportunity cost of keeping cash tied to interest-bearing accounts. Since the rates were well below inflation, it brought a huge influx of capital into the market. Even with Chinese officials increasing the premium of trading trifold and warnings of “structural bubbles” the market only dipped for a short while. Then a major blow to the Shenghai’s market came when Chinese investors began to seriously doubt America’s chances of avoiding a recession. This impacts them heavily since the U.S. is their biggest export market. Since our investment and consumption is low, with the current housing and other market crises, we buy less Asian crap and U.S. investment in Asian companies falls because of their super inflated values. There are also current and perceived monetary policy changes that could have caused the steep decline in the stock market. Since “prices are rising at 8.3 per cent a year” China is worried about their economy becoming heavily inflated. So the People’s Bank of China (PBoC) have increased the rate at which they lend money in order to decrease capital inflow to the markets. Another measure the PBoC has taken, in an effort to harness the excess liquidity of the markets, is raising the bank’s minimum reserve ratio an astounding 15 times since halfway through 2006. There may also be necessary future rate increases to help curb inflation. These drastic policy increases have definitely put a dent in investment, both foreign and domestic. As a result of both the aforementioned policy changes and global financial disasters, Shenghai’s markets show that over the next year the will be trading at more economically stable levels. Nonetheless, this more realistic market is not what investors want to put their capital into. There could be some hope for investors with a predicted “peak in inflation and healthy first quarter results”. However, pessimism still lingers because of the fear of further market decline.
From class we know that there are several scenarios that might cause stock value (V) to drop. The equation that computes stock value includes 3 other variables: the real interest rate, the growth rate, and current profits. Value and interest rate share an inverse relationship, so if rates go up then value falls. This is because when interest rates go down so does output (Y) which means less capital in and thus stock value decreases (and vice-versa). Stock value and the growth rate (g), taken from the Solow model, share a positive correlation or when g goes up, V does as well. Usually if a country has high savings, a high productivity level (A), and low population growth, they will have a high growth rate, which will make stock values higher. Productivity is a product of the levels of three things: human capital, technology and institutions. Human capital refers to the skills and knowledge in the labor force and institutions are the laws and governing bodies. The first two, respectively, will increase the amount of productivity when they grow. Another important variable in determining V is the current profit level; they also share an obviously positive interaction with stock values. There are two factors that influence profits: the real interest rate and capital stock. If either one goes up, so will current profits. So if profits increase, V will, as a result, rise too.
China is taking a very (obviously) proactive approach in controlling their market situation. Harnessing the liquidity is essential in reducing inflation but they definitely cannot control America’s recession, which could have quite a large impact on their marjet. Although investment has fallen and might continue downward with all the skepticism about future decline in the market, the levels are more realistic so it doesn’t seem to be too much of a loss. A moral issue also arises because as the prices going up with inflation the consumer must pay more for goods and that may leave even more people homeless and hungry. But economists don’t care about right and wrong, are they?
According to this article, not only has subprime mortgage brought US with crashing stock prices and it has brought significant decline in Chinese equity market. The Chinese stock market in Shanghai is down nearly 46 percent from their all time highs from last year. They are experts believe that they are no new policies came out from the government and also the unoptimistic environment. Many investors fear that some Chinese stocks are overpriced. The effects of this might be making Chinese investors pessimistic about the stability and future of Chinese companies. In class, we discussed a lot about the inflation and it seems to be the issue China as well. Inflation is never good for stocks, but the market is, for now, ignoring the warning signs of increasing inflation and interest rates. As inflation increases, there is increased pressure to earn higher returns. Both Shanghai and Shenzhen composite indexes are over-valued and their P/E is high. Part of the reason for the increasing domestic interest in stocks is the low interest paid on deposits, which is regulated by the government. Investors have very few alternatives to invest outside China, and high savings are the norm as there are few pension and health benefits provided for older workers. Despite the significant decline in Chinese stock market now I still firmly believe China is a trade power, right at the center of the global economy and responsible for the effective running of the global trading system. Additionally, even with the crash of Chinese stock market it won’t slow down the growth rate of Chinese economy. All stock markets run through boom and bust. The Chinese market is still very young it’s the only country that has defied economic cycle theories.
About a week ago the Shanghai composite index closed at 3,291 (it went down 46.3%). This goes to show that the US is not the only one with falling stock prices. China, all of Asia, has seen decreases in value of shares. The government seems to think that it is because of inflation. Another reason could be the fact that some companies sell stocks to the public at a discount rate. Regardless, these market problems are causing investors to be skeptical which could pose long term issues. It is important to note that the central bank is doing what it can to minimize inflation affects. They have increased the rate at which they lend money and raised the banks minimum reserve ratio. Both of these tactics can be beneficial to the market. The next question is what can be done about the decrease in domestic and foreign investment? According to the article, Shanghai plans to trade more effectively and economically. Hopefully this will help to create investment interest or at least stop back lash. In class we discuss many way which cause stock value to drop. Things such as growth rates, current profits, and real interest rates have major affects on stock value. According to the Solow model, when growth rates increase so does stock value. This could correlate to a low population growth and a high level of savings. When interest rates go up, stock value falls. This is because output goes down which creates less capital. As far as profits are concerned, more money equals higher value. I think china is taking some necessary steps to help their market situation. It is important to remember that this is a slow process, it will take some time.
Andrew Wood’s article “Investors in China brought back down to earth” deals with the falling stock market in Shanghai. During 2007 the market reached an all time high in October, only to fall by 46.3 percent bringing them to pretty much the same spot they were in last April. There are a few possible reasons as to why this has been happening. One such reason could be the rampant inflation China is facing; the CPI is rising at 8.3 percent a year. The People’s Bank of China has been trying to control it to no avail. They have increased the reserve ratio 15 times over the last two years. Increasing the ratio is an attempt to decrease the money supply and raise interest rates. At the same time the government tripled taxes on trades to try to cool the market. This should have also caused interest rates to rise by reducing the amount of money people could save. Higher interest rates should have meant higher investment. The government’s tax was in response to many companies finding it better to speculate in the market than to invest in new machinery. With interest rates being raised by both the IS and LM curves output was increased. The fall in the market could be contributed to reverting back to the original equilibrium value. Another reason given to the falling stock market is believed to be a result of the current United States market. The United States is China’s largest importer of goods. The United States is in a recession, meaning we have less money to be invested both domestically and foreign. Our foreign investment in China is counted in their investment. With smaller investments, net exports are decreasing for them. This hurts them twice as much. Investment and net exports are both falling causing their GDP to be much lower as their consumption levels have always been low. When investment and net exports were high they saw a boost in their economy. They are now going back to their original equilibrium. I see the poor stock market as a good thing for my investment needs. I do not want a booming economy when I am trying to invest. Lower prices on stock means I can buy more shares. In the long run when prices go back up, I will have more invested then I could have had previously. This greatly helps when trying to invest for retirement.
This article deals with the decline in value of the Chinese Stock market, which dropped 46.3% from its record value of 6124 in October 2007. It seems as though this is not a good time for investing in the markets globally. The article describes the various reasons why the market took such a hit. The first reason given was that investors did not invest in the market because they were expecting policy changes from government authorities to help boost the market. Without out this being done investors find it hard to trust putting their money in the market. Another reason aiding to the fall in the value of the market was the taxation on share transactions placed by the government in order to try and “cool down” the market. Shortly after the US stock markets started falling and since the US is one of China’s greatest export partners this affected the Chinese stock market. At the same time inflation rates and overall prices in China were growing, making purchases more expensive also leading to the devaluation of the market. Returns on Initial Public Offerings in the Chinese market were also decreasing, reporting a decrease of almost 30%. China Pacific Insurance’s share price dropped below that in which it initially started trading. With this drop a trend started causing the prices of other companies trading in the market to fall as well. Some more optimistic market analysts believed that overall prices in the Chinese markets were too high and the fall felt at the moment is just a way of normalizing the market and bringing prices to more reasonable values. After the internet and information technology boom that the world went through a couple of years ago it seems normal, or at least expected, that since neither the internet nor information technology are no longer innovative products that the markets should adjust to this. Even though the US stock markets might not be the strongest ones at the moment one cannot ignore the fact that the markets are still influential. The US has been involved for a couple of years now in the sub prime mortgages crises and this inevitably finished to bring the markets down. I believe the drag in the US markets led in some way to the fall of the Chinese stock market. Also the Chinese stock market experienced a growth that in some ways seemed unnatural. The markets were clearly not efficient since companies were speculating in the market instead of investing in capital. Probably the market, as it became stronger, also became more efficient and this caused prices to adjust which probably might have caused the fall experienced to date.
This article by Andrew Wood discusses the crashes that the Chinese stock market has been facing recently. The bigger of the two Chinese mainland stock markets, located in Shanghai has seen its shares lose a lot of value over the last sixth months. It is down almost fifty percent from the high of six thousand one hundred and twenty four. The Shanghai market was the best performing the big Asian markets in two thousand and seven.
The Chinese government is expected to intervene with some new policy, but so far they have remained silent. Thus the trend of lost value continues as a the Chinese investors fear for the future. It is ironic, the twist this story has taken, how just about one year ago the Chinese government was worried about the stock market growing too rapidly. The trend of rapid growth turned around in May two thousand and seven when the Chinese government tripled the tax on share trading. This was followed shortly by and article in the Chinese Securities Journal that warned of a bubble market that was ready to burst. Then as the United States economy continued to falter Chinese investor began to worry that the country that was the major buyer of their goods was going into recession. Important Chinese companies have also begun to flounder as shares in the company dropped below the price they were offered in 2006. The market is beginning to show signs that this lose in value of the stocks has finally come to the end, but pessimism still abounds among Chinese investors.
China is also facing a high inflation rate and are combating that with an increase in bank reserve requirement to decrease the money supply and lower interest rates. This is just a minor market realignment that occurs among all stock exchanges all over the world. Historically this happens often, especially in developing countries like China. Most likely their will be no more long term effect on China or the market. This is demonstrate just how much stock markets on run by hear say. One editorial article cause the investors to run for the hills.
Andrew Wood’s article, “Investors in China Brought Back Down to Earth”, explains how America is not alone in stock market declines. Asia’s best performing market, the Shanghai composite index, has recently seen large losses. Investors expected a policy change from the Chinese government however no changes were made. These expectations added to the declining market’s losses. In the past the Shanghai composite index has been thought of as unstoppable. It shocked investors that the market prevailed during the mortgage crisis; so much that some considered investment in Shanghai as being more profitable as opposed to investing domestically within their own companies. The authorities decided to triple the tax on share trading in order to slow the market. The Chinese government also published an editorial that boasted the market’s performance as extremely unusual. The article also warned of potential structural bubbles, however later on the market began to sore again until Chinese investors questioned the Federal Reserve’s ability to prevent an American recession. Since the United States of America is the leading importer of Chinese goods, the Federal Reserve’s lack of actions caused the Chinese to feel the effects of American influences on global markets. Other reasons for decline can be explained by China’s rising inflation. Some fear that the Chinese government’s policy changes may be too much for investors to handle. Steven Sun, an equity strategist, explains that prices will continue to fall throughout 2008 as billions on non-tradable shares will flood the market. While some analysts remain optimistic and believe there will be gains in investment, others fear the Shanghai composite will eventually fall to below fifty percent of the markets peak. On a personal note, I look forward to seeing how the continuation of shifts in Asian markets will affect Americans domestically. Will China grow to surpass America as a world leader? Will recent objections from American consumers affect Chinese imports? How will a foreign recession be felt in America? Will the citizens of China become individually wealthier? I anticipate these questions will be answered shortly.
The Shanghai stock market in China has finally hit a snag. After lucrative investments in China for the past couple of years, fueling the economy's growth, the Shanghai stock market has fallen considerably in the past 6 months. The rapid growth in China had force prices to rise considerably thus the government of China decided to intervene. The government in crease the ¨tax on sharetrading¨ hoping to slow down the amount on trading. As well as increasing taxes on trading the People's Bank of China also decreased the money supply to combat the inflation. With rapid growth and rapid inflation more analyst feared a sharp downturn especially with the subprime bubble busting in the United States as well as the credit crunch. Amazingly the Chinese market answering with a 20 percent growth. Finally fears over continue decline in the US market as well as over priced stock in the Chinese market led to the crash. The Chinese rely very heavily on the US market for they are their largest imported of Chinese goods, and with the oncoming of a recession in the United States, fears of less investment followed.
While the Shanghai has been brought back to reality, the real question is where will it go in the very near future. Although China's largest market is struggling, the continued growth of China itself will play an important part in its market ass well. For me there is no reason why the Chinese Stock market would not resume its upward trend. The market has just been taken back down to reasonable prices so we should see an increase in investment. With emerging markets and city and population growth in China as well as the 2008 Olympics all warranting increases in spending and investments into the country, it can expect to see further growth with further sand-boxing away from other markets.
This article talks about the Chinese stock market that has gone down 46% and that even tho china is doing good financially, it's stock prices are going down. depending on the growth and interest rate of a county, it is how the Value of the stock is evaluated. China's growth has been rapid thus decreasing the value of the stock and the fact that their output is low, but growing thanks to some policies, it still affects the value of the stock. the advantage of this is that many people in the US or other countries can use this as an advantage to buy more stock and invest
This article talks about the Chinese stock market that has gone down 46% and that even tho china is doing good financially, it's stock prices are going down. depending on the growth and interest rate of a county, it is how the Value of the stock is evaluated. China's growth has been rapid thus decreasing the value of the stock and the fact that their output is low, but growing thanks to some policies, it still affects the value of the stock. the advantage of this is that many people in the US or other countries can use this as an advantage to buy more stock and invest
Chinа’s cаpitаl mаrkеt hаs bееn stаgnаnt sincе Junе 2001, which is not quitе normаl. Thеrе аrе multiplе rеаsons еxplаining this situаtion. Onе is а misundеrstаnding of thе cаpitаl mаrkеt’s dеvеlopmеnt cаusеd by flаwеd thinking. This typе of thinking hаs hаd а nеgаtivе impаct on thе cаpitаl mаrkеt bеcаusе pеoplе gеnеrаlly rеjеctеd Chinа’s cаpitаl mаrkеt аnd hаvе bееn аrguing аnd аdvocаting а “nеw stаrt”.
Еаrliеr this yеаr, thе Shаnghаi аnd Shеnzhеn Stock Indеx sеt а rеcord, whеn thе lаrgеst singlе-dаy dеclinе in thе mаrkеt occurrеd, which rеsultеd in а nаtionwidе dеbаtе. Somе pеoplе wеrе clаiming thаt thеrе wаs а sеrious bubblе in thе stock mаrkеt. This incorrеct conclusion wаs cаusеd by а biаsеd аnаlysis of thе stock mаrkеt.
Morеovеr, cеrtаin bubblеs аrе normаl to occur in thе cаpitаl mаrkеt. Thеrе is no thrеаt аs long аs thе bubblеs аrе smаll аnd do not form а risk to thе hеаlthy dеvеlopmеnt of thе mаrkеt. Аlthough thе dеclinе wаs аn inеvitаblе rеbound, аnxiеty аnd rumors rеgаrding “thе еxistеncе of sеrious bubblеs” in thе Chinеsе stock mаrkеt, furthеr аggrаvаtеd thе fаll.
15 comments:
China is going back to its equilibrium after months of prosperity. Thanks to the sub prime mortgage crisis, China was able to gain new economic growth at a time when other developing countries would have been hurting. This new growth would only be a temporary one and would sink right back to where it started. In May 2007, the government increased the “tax on share trading.” The government’s goal was to help slow down the market. The prices after the tax increase fluctuated up and down. The final result was that the shares prices had dropped and would keep dropping.
Another analyst believes that the fear of inflation would warrant the change from a booming period to a diminishing one. This fear of inflation caused the People’s Bank of China to decrease the money supply, by “increasing the reserve requirement and also increasing the lending rate.” The drop in the money supply would have caused there to be less money for investment in the Chinese market. Since there is less money to be lent out for investment, the rate at which the banks give it out would have gone up as well. This would have lowered investment in China.
The People’s Bank of China did cause the prices to drop but the actions they did
were too much and made prices drop “below their offer prices” This has caused some businesses to lose some future investment and is bad side effect of the drop. Even with the drop in growth in China, there is still good news. The future speculation is in favor of the Chinese markets and this alone means that the markets will grow again.
One thing that was discussed in class was inflation. This article helps prove to show how much of a concern it is for economies out there. If inflation grows to big, then it will be hard for a consumer to tell when it is appropriate to buy something due to how unstable the market is. In order for the market to be stable prices of all goods must also remain stable.
Note* I am an idiot and didn't realize what I was supposed to be doing. This is my first attempt at the comments thing and from how I feel about it this one is utter trash. I figured it out on my second attempt.
The U.S. is not the only country with crashing stock prices. China has seen significant shares in its countries stock markets decline rapidly over the past year, reverting back to norms from 2007. The Shanghai market has dropped some 46% to levels that have not been seen for quite some time. Analysts speculate that the cause of the change is the pessimistic outlook on the market until the government invokes new policy changes.
The government concedes that the cause of the sharp decline in the markets is because of the rising inflation over the last several years that has ballooned to an annual 8% increase. Companies that have floated, or allowed their stocks to be sold to the public, have seen their prices fall dramatically to below their initial offering price. This certainly does not bode well for the outlook of these Chinese markets. Inflationary prices and speculative investment equate to worrisome consumers, and without the purchasing power of these consumers the markets will struggle.
However, this isn't to say some traders are not optimistic. Shares are still being traded at high volumes and many believe that a positive first quarter could pull the market out of its current rut. Personally, I feel that this is only a small picture that helps complete the puzzle of the world economic state today. With so many countries struggling or in a recession, China is just one of many who may endure a struggling economy for the next few years.
- Joseph Kelley
This article discusses how the prices of Chinese stocks have performed a one hundred and eighty degree turn and have now dramatically dropped in the past six months. The Chinese stock market in Shanghai is now down nearly 46 percent from their all time highs. Experts believe that the one reason for the drop in the stock market due to the “pessimistic atmosphere” surrounding the market until the government can successful supply investors with proper policy changes. The government feels that the recent slope in the market is due to the inflation levels, which have continued to rise sharply for the past several years. Many investors are fearful of the Chinese stock because many companies are now well below their initial prices. This is causing many of the Chinese consumers to become fearful of the stability of the Chinese companies and hesitant about investing.
People believe that there are reasons for the declines in stock prices. Some feel that the government does not want the Chinese economy to “overheat” with the high inflation and the sharp increase in the consumer prices. The Chinese central bank is working hard to find ways to minimize the effects from inflation. However, stock prices may even be dropped further because “there are still billions of non-tradable shares locked up from earlier flotations that will be released on to the market in the second half of this year.” Nonetheless, some trades have managed to remain optimistic throughout this entire stock market fall. Many traders are continuing to work to keep the market going. They feel that the Chinese stock market just needs to see a peak in inflation and have one healthy quarter to “boost investor sentiment” and get the stock market back up. I believe that China is going to be able to get their stock market back to respectable levels. They are not the only country experiencing problems in their market. I feel that many United States companies are going to help china because of the large role that that China plays in the United States economy. Also, I feel that China is still a developing country and it is going to take some time till they have all of the proper policy in place and they are able to stabilize the markets and the economy. I have no doubt that this will happen, and when it does, China will be competing with the United States to be the world superpower.
According to Financial Times, the Shenghai stock market has seen a weird turn of events over the last year. In 2007, the Shenghai market achieved a record high and dominated Asia’s exchanges. This surge was created by the high opportunity cost of keeping cash tied to interest-bearing accounts. Since the rates were well below inflation, it brought a huge influx of capital into the market. Even with Chinese officials increasing the premium of trading trifold and warnings of “structural bubbles” the market only dipped for a short while.
Then a major blow to the Shenghai’s market came when Chinese investors began to seriously doubt America’s chances of avoiding a recession. This impacts them heavily since the U.S. is their biggest export market. Since our investment and consumption is low, with the current housing and other market crises, we buy less Asian crap and U.S. investment in Asian companies falls because of their super inflated values.
There are also current and perceived monetary policy changes that could have caused the steep decline in the stock market. Since “prices are rising at 8.3 per cent a year” China is worried about their economy becoming heavily inflated. So the People’s Bank of China (PBoC) have increased the rate at which they lend money in order to decrease capital inflow to the markets. Another measure the PBoC has taken, in an effort to harness the excess liquidity of the markets, is raising the bank’s minimum reserve ratio an astounding 15 times since halfway through 2006. There may also be necessary future rate increases to help curb inflation. These drastic policy increases have definitely put a dent in investment, both foreign and domestic. As a result of both the aforementioned policy changes and global financial disasters, Shenghai’s markets show that over the next year the will be trading at more economically stable levels. Nonetheless, this more realistic market is not what investors want to put their capital into. There could be some hope for investors with a predicted “peak in inflation and healthy first quarter results”. However, pessimism still lingers because of the fear of further market decline.
From class we know that there are several scenarios that might cause stock value (V) to drop. The equation that computes stock value includes 3 other variables: the real interest rate, the growth rate, and current profits. Value and interest rate share an inverse relationship, so if rates go up then value falls. This is because when interest rates go down so does output (Y) which means less capital in and thus stock value decreases (and vice-versa). Stock value and the growth rate (g), taken from the Solow model, share a positive correlation or when g goes up, V does as well. Usually if a country has high savings, a high productivity level (A), and low population growth, they will have a high growth rate, which will make stock values higher. Productivity is a product of the levels of three things: human capital, technology and institutions. Human capital refers to the skills and knowledge in the labor force and institutions are the laws and governing bodies. The first two, respectively, will increase the amount of productivity when they grow. Another important variable in determining V is the current profit level; they also share an obviously positive interaction with stock values. There are two factors that influence profits: the real interest rate and capital stock. If either one goes up, so will current profits. So if profits increase, V will, as a result, rise too.
China is taking a very (obviously) proactive approach in controlling their market situation. Harnessing the liquidity is essential in reducing inflation but they definitely cannot control America’s recession, which could have quite a large impact on their marjet. Although investment has fallen and might continue downward with all the skepticism about future decline in the market, the levels are more realistic so it doesn’t seem to be too much of a loss. A moral issue also arises because as the prices going up with inflation the consumer must pay more for goods and that may leave even more people homeless and hungry. But economists don’t care about right and wrong, are they?
According to this article, not only has subprime mortgage brought US with crashing stock prices and it has brought significant decline in Chinese equity market. The Chinese stock market in Shanghai is down nearly 46 percent from their all time highs from last year. They are experts believe that they are no new policies came out from the government and also the unoptimistic environment. Many investors fear that some Chinese stocks are overpriced. The effects of this might be making Chinese investors pessimistic about the stability and future of Chinese companies.
In class, we discussed a lot about the inflation and it seems to be the issue China as well. Inflation is never good for stocks, but the market is, for now, ignoring the warning signs of increasing inflation and interest rates. As inflation increases, there is increased pressure to earn higher returns. Both Shanghai and Shenzhen composite indexes are over-valued and their P/E is high. Part of the reason for the increasing domestic interest in stocks is the low interest paid on deposits, which is regulated by the government. Investors have very few alternatives to invest outside China, and high savings are the norm as there are few pension and health benefits provided for older workers.
Despite the significant decline in Chinese stock market now I still firmly believe China is a trade power, right at the center of the global economy and responsible for the effective running of the global trading system. Additionally, even with the crash of Chinese stock market it won’t slow down the growth rate of Chinese economy. All stock markets run through boom and bust. The Chinese market is still very young it’s the only country that has defied economic cycle theories.
About a week ago the Shanghai composite index closed at 3,291 (it went down 46.3%). This goes to show that the US is not the only one with falling stock prices. China, all of Asia, has seen decreases in value of shares. The government seems to think that it is because of inflation. Another reason could be the fact that some companies sell stocks to the public at a discount rate. Regardless, these market problems are causing investors to be skeptical which could pose long term issues.
It is important to note that the central bank is doing what it can to minimize inflation affects. They have increased the rate at which they lend money and raised the banks minimum reserve ratio. Both of these tactics can be beneficial to the market. The next question is what can be done about the decrease in domestic and foreign investment? According to the article, Shanghai plans to trade more effectively and economically. Hopefully this will help to create investment interest or at least stop back lash.
In class we discuss many way which cause stock value to drop. Things such as growth rates, current profits, and real interest rates have major affects on stock value. According to the Solow model, when growth rates increase so does stock value. This could correlate to a low population growth and a high level of savings. When interest rates go up, stock value falls. This is because output goes down which creates less capital. As far as profits are concerned, more money equals higher value. I think china is taking some necessary steps to help their market situation. It is important to remember that this is a slow process, it will take some time.
Andrew Wood’s article “Investors in China brought back down to earth” deals with the falling stock market in Shanghai. During 2007 the market reached an all time high in October, only to fall by 46.3 percent bringing them to pretty much the same spot they were in last April. There are a few possible reasons as to why this has been happening. One such reason could be the rampant inflation China is facing; the CPI is rising at 8.3 percent a year. The People’s Bank of China has been trying to control it to no avail. They have increased the reserve ratio 15 times over the last two years. Increasing the ratio is an attempt to decrease the money supply and raise interest rates. At the same time the government tripled taxes on trades to try to cool the market. This should have also caused interest rates to rise by reducing the amount of money people could save. Higher interest rates should have meant higher investment. The government’s tax was in response to many companies finding it better to speculate in the market than to invest in new machinery. With interest rates being raised by both the IS and LM curves output was increased. The fall in the market could be contributed to reverting back to the original equilibrium value.
Another reason given to the falling stock market is believed to be a result of the current United States market. The United States is China’s largest importer of goods. The United States is in a recession, meaning we have less money to be invested both domestically and foreign. Our foreign investment in China is counted in their investment. With smaller investments, net exports are decreasing for them. This hurts them twice as much. Investment and net exports are both falling causing their GDP to be much lower as their consumption levels have always been low. When investment and net exports were high they saw a boost in their economy. They are now going back to their original equilibrium.
I see the poor stock market as a good thing for my investment needs. I do not want a booming economy when I am trying to invest. Lower prices on stock means I can buy more shares. In the long run when prices go back up, I will have more invested then I could have had previously. This greatly helps when trying to invest for retirement.
Investors in China brought back down to earth
This article deals with the decline in value of the Chinese Stock market, which dropped 46.3% from its record value of 6124 in October 2007. It seems as though this is not a good time for investing in the markets globally. The article describes the various reasons why the market took such a hit. The first reason given was that investors did not invest in the market because they were expecting policy changes from government authorities to help boost the market. Without out this being done investors find it hard to trust putting their money in the market. Another reason aiding to the fall in the value of the market was the taxation on share transactions placed by the government in order to try and “cool down” the market. Shortly after the US stock markets started falling and since the US is one of China’s greatest export partners this affected the Chinese stock market. At the same time inflation rates and overall prices in China were growing, making purchases more expensive also leading to the devaluation of the market. Returns on Initial Public Offerings in the Chinese market were also decreasing, reporting a decrease of almost 30%. China Pacific Insurance’s share price dropped below that in which it initially started trading. With this drop a trend started causing the prices of other companies trading in the market to fall as well. Some more optimistic market analysts believed that overall prices in the Chinese markets were too high and the fall felt at the moment is just a way of normalizing the market and bringing prices to more reasonable values.
After the internet and information technology boom that the world went through a couple of years ago it seems normal, or at least expected, that since neither the internet nor information technology are no longer innovative products that the markets should adjust to this. Even though the US stock markets might not be the strongest ones at the moment one cannot ignore the fact that the markets are still influential. The US has been involved for a couple of years now in the sub prime mortgages crises and this inevitably finished to bring the markets down. I believe the drag in the US markets led in some way to the fall of the Chinese stock market.
Also the Chinese stock market experienced a growth that in some ways seemed unnatural. The markets were clearly not efficient since companies were speculating in the market instead of investing in capital. Probably the market, as it became stronger, also became more efficient and this caused prices to adjust which probably might have caused the fall experienced to date.
This article by Andrew Wood discusses the crashes that the Chinese stock market has been facing recently. The bigger of the two Chinese mainland stock markets, located in Shanghai has seen its shares lose a lot of value over the last sixth months. It is down almost fifty percent from the high of six thousand one hundred and twenty four. The Shanghai market was the best performing the big Asian markets in two thousand and seven.
The Chinese government is expected to intervene with some new policy, but so far they have remained silent. Thus the trend of lost value continues as a the Chinese investors fear for the future. It is ironic, the twist this story has taken, how just about one year ago the Chinese government was worried about the stock market growing too rapidly. The trend of rapid growth turned around in May two thousand and seven when the Chinese government tripled the tax on share trading. This was followed shortly by and article in the Chinese Securities Journal that warned of a bubble market that was ready to burst. Then as the United States economy continued to falter Chinese investor began to worry that the country that was the major buyer of their goods was going into recession. Important Chinese companies have also begun to flounder as shares in the company dropped below the price they were offered in 2006. The market is beginning to show signs that this lose in value of the stocks has finally come to the end, but pessimism still abounds among Chinese investors.
China is also facing a high inflation rate and are combating that with an increase in bank reserve requirement to decrease the money supply and lower interest rates. This is just a minor market realignment that occurs among all stock exchanges all over the world. Historically this happens often, especially in developing countries like China. Most likely their will be no more long term effect on China or the market. This is demonstrate just how much stock markets on run by hear say. One editorial article cause the investors to run for the hills.
James Walsh T-Th 1 to 2:30
Andrew Wood’s article, “Investors in China Brought Back Down to Earth”, explains how America is not alone in stock market declines. Asia’s best performing market, the Shanghai composite index, has recently seen large losses. Investors expected a policy change from the Chinese government however no changes were made. These expectations added to the declining market’s losses. In the past the Shanghai composite index has been thought of as unstoppable. It shocked investors that the market prevailed during the mortgage crisis; so much that some considered investment in Shanghai as being more profitable as opposed to investing domestically within their own companies. The authorities decided to triple the tax on share trading in order to slow the market. The Chinese government also published an editorial that boasted the market’s performance as extremely unusual. The article also warned of potential structural bubbles, however later on the market began to sore again until Chinese investors questioned the Federal Reserve’s ability to prevent an American recession. Since the United States of America is the leading importer of Chinese goods, the Federal Reserve’s lack of actions caused the Chinese to feel the effects of American influences on global markets. Other reasons for decline can be explained by China’s rising inflation. Some fear that the Chinese government’s policy changes may be too much for investors to handle. Steven Sun, an equity strategist, explains that prices will continue to fall throughout 2008 as billions on non-tradable shares will flood the market. While some analysts remain optimistic and believe there will be gains in investment, others fear the Shanghai composite will eventually fall to below fifty percent of the markets peak. On a personal note, I look forward to seeing how the continuation of shifts in Asian markets will affect Americans domestically. Will China grow to surpass America as a world leader? Will recent objections from American consumers affect Chinese imports? How will a foreign recession be felt in America? Will the citizens of China become individually wealthier? I anticipate these questions will be answered shortly.
The Shanghai stock market in China has finally hit a snag. After lucrative investments in China for the past couple of years, fueling the economy's growth, the Shanghai stock market has fallen considerably in the past 6 months. The rapid growth in China had force prices to rise considerably thus the government of China decided to intervene. The government in crease the ¨tax on sharetrading¨ hoping to slow down the amount on trading. As well as increasing taxes on trading the People's Bank of China also decreased the money supply to combat the inflation. With rapid growth and rapid inflation more analyst feared a sharp downturn especially with the subprime bubble busting in the United States as well as the credit crunch. Amazingly the Chinese market answering with a 20 percent growth. Finally fears over continue decline in the US market as well as over priced stock in the Chinese market led to the crash. The Chinese rely very heavily on the US market for they are their largest imported of Chinese goods, and with the oncoming of a recession in the United States, fears of less investment followed.
While the Shanghai has been brought back to reality, the real question is where will it go in the very near future. Although China's largest market is struggling, the continued growth of China itself will play an important part in its market ass well. For me there is no reason why the Chinese Stock market would not resume its upward trend. The market has just been taken back down to reasonable prices so we should see an increase in investment. With emerging markets and city and population growth in China as well as the 2008 Olympics all warranting increases in spending and investments into the country, it can expect to see further growth with further sand-boxing away from other markets.
This article talks about the Chinese stock market that has gone down 46% and that even tho china is doing good financially, it's stock prices are going down.
depending on the growth and interest rate of a county, it is how the Value of the stock is evaluated. China's growth has been rapid thus decreasing the value of the stock and the fact that their output is low, but growing thanks to some policies, it still affects the value of the stock.
the advantage of this is that many people in the US or other countries can use this as an advantage to buy more stock and invest
This article talks about the Chinese stock market that has gone down 46% and that even tho china is doing good financially, it's stock prices are going down.
depending on the growth and interest rate of a county, it is how the Value of the stock is evaluated. China's growth has been rapid thus decreasing the value of the stock and the fact that their output is low, but growing thanks to some policies, it still affects the value of the stock.
the advantage of this is that many people in the US or other countries can use this as an advantage to buy more stock and invest
Chinа’s cаpitаl mаrkеt hаs bееn stаgnаnt sincе Junе 2001, which is not quitе normаl. Thеrе аrе multiplе rеаsons еxplаining this situаtion. Onе is а misundеrstаnding of thе cаpitаl mаrkеt’s dеvеlopmеnt cаusеd by flаwеd thinking. This typе of thinking hаs hаd а nеgаtivе impаct on thе cаpitаl mаrkеt bеcаusе pеoplе gеnеrаlly rеjеctеd Chinа’s cаpitаl mаrkеt аnd hаvе bееn аrguing аnd аdvocаting а “nеw stаrt”.
Еаrliеr this yеаr, thе Shаnghаi аnd Shеnzhеn Stock Indеx sеt а rеcord, whеn thе lаrgеst singlе-dаy dеclinе in thе mаrkеt occurrеd, which rеsultеd in а nаtionwidе dеbаtе. Somе pеoplе wеrе clаiming thаt thеrе wаs а sеrious bubblе in thе stock mаrkеt. This incorrеct conclusion wаs cаusеd by а biаsеd аnаlysis of thе stock mаrkеt.
Morеovеr, cеrtаin bubblеs аrе normаl to occur in thе cаpitаl mаrkеt. Thеrе is no thrеаt аs long аs thе bubblеs аrе smаll аnd do not form а risk to thе hеаlthy dеvеlopmеnt of thе mаrkеt. Аlthough thе dеclinе wаs аn inеvitаblе rеbound, аnxiеty аnd rumors rеgаrding “thе еxistеncе of sеrious bubblеs” in thе Chinеsе stock mаrkеt, furthеr аggrаvаtеd thе fаll.
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