China’s Stock Market Bubble Burst Fast

I wrote about China’s stock market bubble in May and September last year. At that time, China was in the news all the time. People both inside China and outside China were very excited about the Chinese stock market. It continued to grow very fast after I wrote the pieces. The Shanghai Composite Index went from 4,000 points in May 2007 to over 6,000 points in October 2007, up 50% in five months. A Chinese bank became the most valuable bank in the world. A Chinese life insurance company became the second most valuable life insurance company in the world. A Chinese oil company became the most valuable company in the world. It was worth a $1 trillion, twice the value of the No.2 Exxon Mobil. A Chinese Internet company had the second largest IPO of an Internet company; only Google’s IPO was larger.

As usual, the euphoria had to end. If people think we have a bad stock market in the U.S., with the talk of recession and what not, look at China. It makes our stock market decline look like a walk in the park. And it’s not just China’s domestic stock market, which people said had a bubble because it’s closed to international investors. The Chinese companies traded on the international markets didn’t fare much better either. This chart below shows the decline of the Shanghai Composite Index, iShares FTSE/Xinhua China 25 Index ETF (FXI), and S&P 500 from November 1, 2007 to March 28, 2008. Click on the chart to enlarge.

The green line on the top is S&P 500. It dropped a little more than 10% in this period. The blue line is Shanghai Composite Index, representing China’s domestic market, which dropped 40%. The red line is iShares FTSE/Xinhua China 25 Index ETF, representing Chinese companies traded on the international markets, which dropped 35%.

Both the Shanghai Composite Index and the iShares China ETF dropped 35-40% in just five months. During the 2000-2002 stock market bubble in the U.S., the S&P 500 dropped about 45% in two and half years. It was the second biggest bear market in a century. Only the 1929-1932 Great Depression was worse. Here we have China’s stock market bubble bursting five times as fast as S&P 500 did in 2000-2002. Has it bottomed? Probably not.

Next time you hear about an exciting opportunity that sounds like a sure thing, don’t get sucked in. What are the exciting opportunities you hear about today?

P.S. As I was preparing this post, reporters at the New York Times apparently had the same idea. See their article in today’s paper: To See a Stock Market Bubble Bursting, Look at Shanghai and the included chart. It looks like there’s still a lot more room to fall.

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  1. Ted says

    “What are the exciting opportunities you hear about today?”

    Gold investing and currency trading come to mind in a more traditional sense.

    In a non-traditional sense, there’s been a wave of elected and appointed government officials giving money away (tax rebates, corporate bailouts). Many groups are now scrambling to get on the train (foreclosed buyers most recently). I wonder if the train is leading our economy over a hill or over the edge of a cliff.

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