Reasons behind big drop in China market
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The common census is China economy growth will slow down significantly, due to the slow down from export (trouble in US economy); rising inflation (food, oil etc.)
The rights of minority shareholders are also not protected as well as mature market, because in some cases the management cooked up the accounting books, and get away from it.
The flaws in market itself
Recent arrest of former vice head of China securities regulatory commission (Wang Yi): people fear this is not an isolated event, and bigger fish will be caught as this thing unravels. Insider trading was rampant and still is prevalent in China. Insider trading reduces the confidence of long term investors, people just want to make quick money and run.
There is no “short” mechanism which makes the market overshoot itself more easily. In China market one can not short a stock, one can only long a stock. In my personal view “short” is a basic strategy, and should be put into place before the “warrants” and planning rollout of “stock index future”. The regulatory is evaluating “allow trade on margin” which should pave the way for “short”.
Talking about warrants: this is another way for Shanghai Securities Exchange (SSE) and brokage houses to rip off the individual investors (more precisely speculators). In my mind one get better odds making money at a casino than playing this Chinese version of Warrants game.
In light of the reasons above, the valuation of Chinese stock should be discounted, compared to peers to the US.