Chinese stock bouble 2007 Research Paper Example | Topics and Well Written Essays - 1750 words

Chinese stock bouble 2007 - Research Paper Example This led to the skyrocketing of trading volume, as retail investors sought to reap the benefits of the record-making rise. According to a 2008 report by Yao and Luo, the SSE had hit 6124.04 by October 2007 (10).   That this was a stock bubble, was not lost on analysts - vice chairman of the National People’s Congress in China, Cheng Siwei, was among one of the many analysts to point out that, following a year of volatility, the Chinese stock market was overheating (qtd. in Tucker & Dyer). Even though the government took steps to tackle the dramatic situation, it could not succeed in heading the bubble off. By the end of 2007, the stock bubble had ‘burst’ - the SSE Composite Index began to see a fall right after October 2007 and, by the middle of 2008, had plunged to a shocking 2651.6 1 - less than half of what the index had been at its peak (Yao and Luo 7). This paper looks at this stock market crash - also known as the Chinese Stock Bubble 2007 - in detail, out lining what it was, the reasons because of which it occurred, and its effects on economic conditions within and outside of China. In addition to this, this paper also uses its review of the Chinese Stock Bubble to provide recommendations for avoiding such market crashes, in the future. THE CHINESE STOCK BUBBLE It has been seen that the Chinese stock market was, preceding the crash, characterized by volatility. This is demonstrated in How We Explain the Chinese Stock Market Bubble?, a report that graphs the rise and fall of the SSE Composite Index, from 2005 to 2008 as follows (1). As apparent from the graph, the Chinese stock market saw a boom at the beginning of 2007. This picked up momentum, until the market crashed at the end of the year. According to Yao and Luo (2), prices of stocks shot up after the Industrial and Commercial Bank of China became listed on several Chinese stock exchanges. The authors point out that, by the time the market had begun to heat, the combined market value of the 1500 odd companies listed on the Shanghai and Shenzhen stock exchanges exceeded a massive 32 trillion RMB (2). Following the American economic recession of 2007 and a realization in investors that large Chinese companies had been moving to milk cash from â€Å"ignorant, prudent savers,† the bubble began to fizzle off - and fast (Yao and Luo 2). Within months, the market value of listed companies had begun to plummet; by June 2008, the combined market value of listed companies had fallen to less than half of what it had been during the bubble (Yao and Luo 2). Individually, the Shanghai Composite Index fell down by over 60%, while the Shehzen Composite Index saw a 60% plunge (Xinhui). Reasons for the Chinese Stock Market Crash American Sub-Prime Lending. While the official explanation for the Chinese stock market crash centred on the influence of American sub-prime lending on the Chinese economy, analysts have argued that this is a superficial justification that do es not delve into the actual reasons underlying the crash (Xinhui). Xinhui points out one valid argument for such criticism - the sub-prime loan crisis resulted in an 11% drop in the S&P Index, whereas the Chinese stock market crash was much more massive. Critically analyzing this chain of thought gives one food for thought - it is hard to believe