The policy makers in China found the silver bullet finanlly, the Shanghai composite index dropped 280 points or 6.5% today May 30, as seen from this news from Bloomberg. This is the biggest drop in a day since Feb 27 (9% drop). The policy makers have warned the investors (or more accurately speculators) for a while, the head of central bank said some words during an international meeting (remember the vice chairman of people’s congress, Mr. Chen’s similar words late last year?); two interest rate hikes; three bank reserve rate hikes. But the new investors seemed ignoring all those warnings, as we have seen from the record account openings since March. We have 100 million accounts in China now. Let me quote some words regarding the “bubble” (I was told this was said by Buffet, but have not verified the source):
“It’s like most trends: At the beginning, it’s driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.”
“Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over,…Orgies tend to be wildest toward the end. It’s like being Cinderella at the ball. You know that at midnight everything’s going to turn back to pumpkins & mice. But you look around and say, ‘one more dance,’ and so does everyone else. The party does get to be more fun — and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice.”
So the clock is 12 AM and the party is about to end? I don’t think so. I think what the goverment really want to see is a “slow bull market”, not the market goes from 2700 to 4200 in 3 months.
Nothing fundamentally has changed from May 29 to May 30. The stamp tax increase did catch many people (especially new guys) by surprise, but I believe some veterans in the industry should have expected this coming. Because the previous rate 0.1% was at historial low, and was in placed in Jan 2005 to encourage investing in stocks. Now at 0.3%, it’s not high compared to historical highs (0.5%).
This move also caught some western analysts by surprise. But they should know many things are done different in China compared to the west. For instance, would the US Federal Reserve raise interest rate in a weekend? China has done it multiple times and it’s no longer a secret weapon. Now this stamp tax rate. If we wear the policy markers’ shoes for a while, we can feel they were desparate. They don’t want to see the market “boom and bust”. What they worried most is a bust before Olympics.
For us average investors, we should just take cue from this message, and save some faces for those policy makers. After all, we want a harminous society, don’t we?