The Shanghai Composite and the Shenzhen A Share stock markets—China’s two largest stock markets—posted large losses yesterday, capping a week of sharp falls. The two markets were down about 13% each. It marked the worst week in China’s stock markets in more than 7 years. Although they are up year-to-date, the sharp losses this week lent weight to speculation that the bubble in the Chinese markets could soon burst. According to Bloomberg,
Fueled by record margin debt and unprecedented numbers of novice investors, China’s market capitalization has tripled in the past year to $9.8 trillion. At 84 times projected earnings, the average stock on mainland exchanges is now almost twice as expensive as it was when the benchmark Shanghai Composite Index peaked in October 2007.
If the Chinese stock market were to fall, it could have dramatic effects both within and outside China. As much as 80 percent of investment in Chinese markets comes from middle-income Chinese citizens, and a sharp decline in their wealth could spark demands for political change.
What do you think? Is China’s stock market a bubble about to burst? If so, what might the effects be on Chinese politics and the legitimacy of the Chinese government? What international effects might a sharp fall in Chinese markets have? How might it affect China’s international influence? Why