Thursday, February 01, 2007


The Recapitulator spoke about the China problem in December. One must recall that central planning has been thoroughly discredited both in theory (predominantly by the great F.A. Hayek) and in practice (the U.S.S.R., Vietnam, and eventually Cuba).

The recent IPOs of Chinese banks illustrates this. The government cleaned up both sides of the balance sheet (by moving Non Performing Loans, or NPLs, to asset management companies, and by simply handing 45 Billion in reserves to the banks in order to shore up the asset side of the ledger). The problem is there was no structural reform accompanying these actions, and so the NPL problem will rear its head again like the Hydra of myth.

As for asset prices:

Chinese shares tumble 5% on fears bubble will burst
The Shanghai index's drop, its biggest since June, is led by blue chips as
concern grows over high stock valuations.
From the Associated Press
February 1, 2007

SHANGHAI — That loud hiss you hear is the sound of some air escaping from
China's stock markets.

For months an equity bubble had been growing in China, led by a rush of
investment after authorities instituted reforms aimed at controlling price
manipulation and other abuses that had made investors shy away from Chinese

On Wednesday, Chinese shares tumbled nearly 5% in their biggest one-day loss
in eight months amid mounting worries that the bubble was about to pop.

Analysts said the decline, led by blue chips, probably signaled a respite
after weeks of continued record highs.

The Shanghai composite index fell 4.9% to 2,786.33, its biggest one-day
decline since a 5.3% tumble June 7, 2006. The smaller Shenzhen composite
index slid 5.8% to 655.53.

"Many traders felt a push to cash out, for even blue chips, such as banks,
are trading at high valuations," said Hao Guomei, an analyst at Huatai
Securities Co.

Wednesday's decline followed warnings from the Shanghai Stock Exchange and
other regulators over rising risks from the market's recent bull run.

Before Wednesday's tumble, the Shanghai index, which tracks China's biggest
companies, was up 9.5% for the year after soaring 134% last year. Trading
volumes have been at record highs amid growing volatility.

China's markets languished for years before reviving last summer after
shareholder reforms and other measures helped bring price manipulation and
other market abuses under control. Market sentiment has been further boosted
by rebounding corporate earnings and an economy that has been growing at a
rate of more than 10% a year.

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