Shanghai Composite Falls: Minor Correction or Warning Sign?


The Shanghai Composite, the exchange where most large Chinese companies trade, dropped 3.7%. The reason stated by experts was that planned government restrictions on cheap money for home buying would end. If property values drop, consumer confidence might drop with it. The drop could be a caution for U.S. market investors.

The Shanghai index was at a 52-week high, and it took very little news to undermine that. No one should be surprised if many markets around the world are overbought. However, the difference between these markets and the Shanghai index is that the Chinese market is nowhere close to its all-time high. It traded 80% above current levels five years ago. In that way, it is like the Nasdaq, which reached highs in 1999 and 2000 that never will be matched again. Optimism in tech pushed the U.S. index to unsustainable levels.

All of this is to say that, although the market in China has sold off, it may still be inexpensive, at least compared to a period of irrational exuberance reached half a decade ago.

Either there is something very wrong with the Chinese economy, or the drop is little more than a blip, based on historical prices.

Filed under: 24/7 Wall St. Wire, China, Exchange News

Originally published