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Is sky falling in stock markets?

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It looks like it. On Monday Jan 21 we have the biggest drop of global stock markets in recent years (see the quoted news below).

I want to talk a little about the Chinese market in specific. It appears to me two pieces of news helped driving the market down. The huge secondary offering of $22 billion from Ping An Insurance (SHA:601318); the talk of starting stock index future market and a Nasdaq-like Market in China after March 2008, by Mr. Cheng Si Wei, Chairman of Finance Committe of National People Congress. 成思危:创业板和股指期货准备工作基本就绪.

But as individual investors I think we should remain calm even in this crazy market. It may be a good idea to get rid of some bubble-priced stocks because we are not going to see that price for a while. Note bubble is relative the intrinsic value of a company, not compared to the previous high price (e.g, VMW, AAPL, N,…are all risky to me).

Quoted news
AP news: stock markets plunge worldwide.

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Ping An and China Life bid shares from each other

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PingAn insurance logo

This is what I heard from a guest at “Market today” (China-CBN). Here is how it works: China Ping’an insurance (601318, 2318.HK) and China Life insurance (601628, 2628.HK, LFC) holds significant shares (more than 3%) from each other. Now they are buying shares from each other in the market, which will drive their stock prices higher. This in turn, will bring more profit (unrealized investment gains) to each company, according to the new accounting rules being effective this year in China. As a side note, investment gains exceeded many public companies’ original (main) business profit this year. For instance, Youngor (600177), the famous apparel maker, makes more money from the investment in Citic Securities (600030) than from shirts/jackets.

I’m not accounting expert, nor have I researched how similar things are counted in US GAAP. But my gut feeling tells me China new accounting rule is one reason for the China bubble right now. Because at the end of the day, those paper profit will be gone as fast as they come.

BTW, I’m just curious, when China Life (LFC) reports to SEC, what kind of accounting do they use?