Is she going up, down, up? - The WTO-column

Shanghai - When you look at the reports on the the Shanghai stock market this week, you might easily think that Chinese experts and foreign analysts are looking at two different exchanges. Foreign media saw a bubble, built up in 2006, coming to an end. Chinese media expecting a prosperous future for the next two, three years.

Now, making a prediction for two, three years ahead sounds a bit like bragging, but I would say that the current upward trend can at least last for another six months.

In fact, both groups of analysts are possibly looking at different things, although they might be united in one stock exchange. Foreign experts might look more at the fundamentals are the driving forces for any stock exchange. In China though, there is this other force that is more important than the market forces: the government, or put better: the expectations of the market on what the government will do.

The prolonged downfall of the stock market that started five years ago was a clear effect of that expectation. The speculators on the market expected that the government would try to sell off the two-third of the state-held shares of the state-owned companies. Up to then, state-owned companies went public with one third of their equity. The stock market was seen as a cash cow, while ownership was kept into the hands of the government agencies that were running the enterprises.

The louder the government denied is was going to sell off its two-third of state-held shares, the lower the shares fell, because the speculators did not believe what the government was saying.

Now, half a decade later, many of those SOE's are restructured, the state-held shares are being diluted, but nobody cares anymore. Compared to five years ago, the companies are not alone better, there is also much more cash available. Since real estate is now out of grace for a while, the stock exchange remains one of few opportunities for Chinese to put their money in.

Already on Wednesday, the shares went only down five percent, even the legal limit of ten percent was not reached, indicated is was a minor change. On Thursday the shares went up again and the grannies and taxi-drivers were again screaming for shares. While those smaller investors constitute only a small percentage of the actually money transactions, their presence at the stock market is a show of trust.

Yes, the relevant government departments have been warning against an overheated stock market. But the measures they have taken were rather symbolic. For the time being there is no reason to see a real cooling down of the stock market. It is a pity for the foreign readers, the excitement is there mainly for the Chinese speculators. But then, making sense out of the Chinese stock market is still very hard for the outside world.

Fons Tuinstra