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Monday, March 31, 2008

Shanghai Market: Cliff Diving

by Calculated Risk on 3/31/2008 02:07:00 PM

Remember when the Shanghai stock market declined 9% on Feb 27, 2007? That caused shock waves around the world, including a 400 points decline in the DOW index the following day. Well, that was nothing and hardly shows up on the following graph.

Shanghai stock market Click on graph for larger image.

After falling to 2772 in Feb 2007, the SSE composite index more than doubled! Now the index has fallen back to 3,472 - still well above the close after the one day sell off - but 43% below the peak.

Is this sell off in anticipation of a slowing Chinese economy? Or is this sell off just giving back some of the "irrational exuberance" of the last year?

There are some concerning signs. From the WSJ last week: Tables Turn Quickly on Chinese Developers

Just six months ago, Chinese property developers were on a shopping spree ... borrowing heavily to snap up more, and more expensive, pieces of land.

How quickly things have changed.

Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade.
Another concern for foreign manufacturers is the new labor laws in China. Over the weekend I spoke with an executive of a U.S. based company that manufactures in China. He told me the new Chinese labor laws, combined with other factors, have increased their manufacturing costs in China by 30%!

Here is an article from Crain's Manchester Business: Made in China
Manchester-based importers who source in China are about to pass on price rises of between 10 and 15 per cent. They say that currency fluctuations, Chinese wage inflation, raw material cost increases and higher freight charges mean that stable or falling prices of manufactured goods are now a thing of the past.
“Four of the factories that we do business with in China won't take dollars now,” said [Stuart Illingworth, managing director of Widdop, Bingham & Co, the Oldham-based giftware importer]. ...

Meanwhile, new labour laws came into force in January which have restricted Chinese workers' hours and led to an increase in labour unit costs.
I've always been skeptical of the decoupling argument, so I wouldn't be surprised to finally see a slowdown in China after the Olympics this summer. In the long run, this rebalancing of the world economy, and these new labor laws are healthy - but in the short term this might lead to more inflation in the U.S.

Note: a slowing Chinese economy might have a positive impact on the U.S. economy by leading to lower oil prices, as I speculated in Petroleum Prices and GCC Spending