China Reforms Will Reduce Volitility – Paulson

Tuesday, March 6, 2007 7:02
Posted in category Invest in China, The Big Picture
Comments Off on China Reforms Will Reduce Volitility – Paulson

For those that were wondering who was to blame last week when the global markets collectively freaked out, Paulson’s statement in Tokyo may give you a hint:

the global economy is as strong as he’s ever seen and that reforms in China would help lessen the kind of market volatility that has recently rocked international stock markets

So.. it is China’s fault….

While I am not an economist (the major I try desperately not to use), I was not the head of a global i bank (my dad would have been so proud), and I am not a member of the bush economic team, there are a few issues that I have here:

1) The Shanghai stock exchange has gone up some 150% in the last year already, and if markets were truly efficient (as my finance 101 teacher said they were), then EVERYONE would have priced in the fact that this market was due for a fall

2) The market went down 8.8% because Premier Wen spoke about upcoming reforms that would ADD stability into the market

To me, this whole thing is funny and alarming at the same time for several reasons:

1) In the last year I have watched senior government officials and stock exchange officials publicly state that they believe only a handful of stocks are of investment quality

2) In that time, NOTHING from an infrastructural point of view has changed

3) In that time, the Shanghai market has gone from the only market in the world that lost 10 years in a row during economic growth … to a market that returned 150% in under a year

So… how was this China’s fault?  with every major bank in the world covering the market from Shanghai’s Lujiazui, how is it that China’s market instability a big surprise?

Maybe if more investors took the time to understand the market itself they would not have invested so much to begin with.. or freaked out like they did.

Finance 101 teachers around the world beat it into students that markets pricing is dynamic and takes publicly available information into account.

So, if that is true, how is it china’s fault?

Isn’t it the analysts, banks, and markets that are supposed to crunch, analyze, and act on information?

Who thought that the Shanghai market was built on solid economics?

Who thought that the Shanghai market was NOT due for a little profit taking?

Answer those two questions, and you will find the guilty parties.

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