Forget About China’s Stock Markets ? Worry About Bush!

The Chinese government has been distressed for several months about a mountain of cash-chasing projects that do not warrant any investment
Jeff's Message to Wall Street — and the Small Investor

March 2, 2007 — Lugano ( — It seems the civilized — or uncivilized — world (depending on your perspective) is atwitter over the reasons behind the precipitous drop in Chinese stocks as well as concern over China’s banking system — which is in shambles due to a heavy burden of bad loans and even worse borrowers.

The scope and size of Chinese loan problems make the current spate of western mortgage defaults appear almost meaningless.

Forget it, Wall Street. China is not your problem.

The stock markets in London and New York are, as usual, reacting emotionally rather than with their brains.  Some of the smartest and least-educated Americans and Brits trade billions of dollars of equities every day — but their surplus testosterone seems to drown their ability to think.

What we witnessed on the Shanghai Composite Index earlier this week was a somewhat carefully controlled drop in market values engineered — wrangled is perhaps a bettter description — by the government in Beijing.  Besides, the nearly nine-percent tumble in the Shanghai and Shenzhen indexes, despite being the largest so far this decade, are in fact not as noteworthy as your neighbor wants you to think.

The underlying cause, in a nutshell, is a Chinese government distressed for several months about a mountain of cash-chasing projects that do not warrant such or even any investment. 

The worst game-players in China are state-owned companies which, to enrich themselves and their executives, took almost unlimited funds available to them subsidized by state banks and opened thousands, perhaps as many as 10,000 firms that were either designed, or so poorly managed, as to remain forever unprofitable.

In doing so, these rascals drove the price of almost everything in China into the relative stratosphere, as well as angering foreign competitors that are looking at a tidal wave of cheap Chinese cargo arriving on their shores.

It doesn’t stop there.  But according to insiders, almost everyone in China who is able is playing their markets.  In January of 2007 the normal 100 million traders in China grew to 250 million and stock turnover soared up nearly 800% from 2006!

To put a stop to this, Beijing is turning off the capital spigot and telling brokers to stop the wild speculation or else. It is working slowly but surely — as evidenced the plunge this past week.

Net result? The Chinese government is happy.

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