[T.S.R:10453] MUST READ ---- Short View: Shanghai surprise: FT

Short View: Shanghai surprise

By John Authers, Investment editor

Published: July 29 2009 18:33 | Last updated: July 29 2009 18:33

The world had an echo on Wednesday of the "Shanghai surprise" that sparked the first panic of the credit crisis.

On February 26 2007, the Shanghai composite index, which had rallied for months, suddenly fell 268 points, or 8.8 per cent. A global sell-off ensued. As it turned out, the first Shanghai bubble kept inflating for six more months before popping in October 2007.

On Wednesday, the Shanghai suddenly fell 265 points, or 7.6 per cent, at the worst point.

This year, the rally has again been impressive, with the Shanghai up 108 per cent from its autumn crisis low. As in the previous bubble, this rally has owed everything to valuation. At the outset in October, the Shanghai traded at 1.9 times its book value (the value of assets minus liabilities on its companies' balance sheets). By Tuesday, this had doubled to 3.78 times book value. The premium China commands over the rest of the world has risen even faster than in the previous bubble.

So what led to the selling? A benign explanation – which the muted global response suggests traders believe for now – is that the market was overextended and due for a correction. The debut of a large initial public offering was an obvious catalyst. With $7.9bn of issuance so far this quarter, this is already the busiest quarter for IPO issuance since the bubble peaked, according to Dealogic.

More concerning, there were press reports that the biggest Chinese banks were about to shut down lending for the year. As loans by Chinese financial institutions are up a stunning 34.4 per cent over the past year, overheating must be a concern.

The word "bubble" can be overused. If this is another share bubble, it is not yet as big as the one that preceded it.

But the two have enough in common to warrant extremely close attention.

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Best Regards,
Haresh Soneji

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"Before anything else, I'm an Indian. And so is this little child. The rights I enjoy as a citizen of this free country are hers too. She has a right to be free. She has a right to be happy. But I'm going to fight for her because she has the right to be a child. I'm going to fight for her every single day, every single moment. With my skills. With my resources. With my heart. I'm going to fight for her because I can. And she can't."
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