The Shanghai index maintains momentum

Font Size

Print

Feedback

Email

Discuss

• Discount UK Shopping

: China does not have any national equity stock market such as National Stock Exchange of India, but Shanghai Stock Exchange (SSE) is the closest to representing the national stock exchange. SSE composite index was roughly half of S&P CNX Nifty at around 1,000 in June 2005 and it rose to a little less than 3,000 by early February gaining almost 200%.

Look more closely and you see that much of the gain has been realised in only past 8 months. The SSE composite index doubled from 1,500 in last 8 months of which 70% increase has been in only past couple of months. The market has had a dream run until the infamous black Tuesday on February 27 when the market dropped by almost 9%.

This was the biggest drop in the 10-year history. The drop in Shanghai triggered a chain reaction and pushing down equities market across the world. The Dow Jones industrial average dropped by 1.4%; Nasdaq composite by 2.2%; S&P 500 lost 1.5 while the indices in Europe went down by almost 2.8%. Immediately, correlations were found, between the sell off in Shanghai with fall elsewhere, on unfounded theories - one of them being the growing importance of China in the global equities market.

The reality could not be far from truth. The US equity market has been rising steadily since the last 8 months in spite of a slowing economy and the declining housing market. Markets in Europe have seen even stronger growth. Emerging markets have risen fastest since the Asian currency crisis. The sell-off was on the horizon and the fall in Shanghai stock exchange seemed to be a perfect excuse for global investors to cash in. The market in Shanghai could have never sustained the mad frenzy where the market went up by more than 10% for six consecutive weeks. At that rate, Shanghai index would have gone up by almost 600% in a year. The fall in SSE was always on the horizon and it was never a question of “if” but of “when”.

Heavy correction in the Shanghai market, Alan Greenspan’s statement of a possibility of US going into recession on the same day and weak corporate earnings was enough to create a perfect storm for investors to cave in to temptation of booking profits. But this did not come without warning signals.