Chinese stocks plummet

Scott Jagow Feb 27, 2007

TEXT OF INTERVIEW

SCOTT JAGOW: China’s stock market has been beefing up like a promising heavyweight fighter. It’s gained 145 percent since the beginning of last year. But today, the market took a beating. Shares plunged 9 percent, wiping out $140 billion. Geoff Dyer is a Financial Times reporter based in Shanghai. Geoff, what happened?

GEOFF DYER: The basic reason is that stocks have become very expensive in Shanghai, so it’s not too surprising to have some kind of correction.

JAGOW: Would you say that there’s been a lot of speculation that has fueled this big boom in the last year?

DYER: There’s definitely been a lot of speculation, it’s a very speculative market. There are some institutional investors now in mainland China, but the market is basically driven by retail investors who have huge volumes of money in Chinese banks receiving negative real interest rates. And so as soon as they get a bit of optimism about the stock market or the property market, you tend to get lots of money, lots of liquidity rushing into those assets. And that’s why you get very big short-term increases and also very big short-term decreases when all of a sudden that optimism disappears.

JAGOW: OK and you mentioned the illegal shares, how big of a problem is that in China?

DYER: There’s lots of anecdotal evidence available, and what we’re talking about is people taking out a mortgage using the money to actually buy shares. We’re talking about state-owned companies speculating shares, which they’re not allowed to do. You hear lots of stories about people pawning their houses to buy shares. It’s definitely going on but it’s probably not the main driving factor behind the market. It’s probably just happening in the margins.

JAGOW: Alright Jeff, thanks so much.

DYER: No problem.

JAGOW: Geoff Dyer from the Financial Times.

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