Chinese bubble bursting

The Japanese equivalent of the Wall Street Journal, the Nihon Keizai Shimbun, reports that some Japanese speculators are playing the Chinese stock market but should be worried about the Chinese bubble bursting. On April 19,
the SCI fell 250 points on rumors of central bank tightening, but recovered all of it the next day to set a new record — definitely bubble behavior. “There were more than 90 million stock trading accounts held by individuals in China as of [April 19],” the Nihon Keizai Shimbun wrote.

“This means that, in theory, one in six urban dwellers is trading stocks.” Earlier, on Feb. 27, when the Shanghai composite index fell by a dramatic 8.8 percent, stock indices around the world followed suit. In the U.S., a computer glitch added to the
sense of panic. The Dow crashed some 500 points as the ticker failed to keep
up with trades, and closed the day down 416.02 points, the biggest oneday point decline since Sept. 17, 2001 (the day the market reopened after 9/11).

The S&P 500 also closed down 3.47 percent, with the Nasdaq down 4 percent. As it happened, European bourses were closed that day, but emerging markets such as Russia, Turkey, and Brazil all posted big losses. It took until April 13 for the S&P to get back to where it had been before Feb. 27 — just in time for the next Shanghai surprise. After this event, though, the American indices barely burped (Figure 1).