From The Financial Times:
The spectacular run-up in equity prices in China in the past two years has created a classic asset bubble. The likelihood that the stock market will crash in the not-too-distant future has recently increased because of rising inflation at home and a global economic slow-down. The Chinese stock market has already begun to correct – the main stock indexes have fallen 15 per cent from their highs. However, with Chinese equity price levels disturbingly close to those of Japan’s Nikkei in 1989 prior to its meltdown, the Chinese market will have to fall much further to reach reasonable valuations.
Most analysts argue that such a collapse will have minimal impact on the real economy. This might well be the case. But such thinking ignores the fact that, when it comes, a Chinese stock market crash will produce serious political consequences. Official figures show that more than 100m people have invested in equities, mostly during the recent bull market run. A massive sell-off will hit their household net worth. Because the Chinese government has been perceived as an active promoter of the country’s stock market, tens of millions of individual investors, members of the privileged urban middle-class, will direct their ire at the government. To make matters worse, most publicly listed companies are state-owned, so investors assume that the state is liable for the collapse of their share prices. [Full Text]