My Two Cents

What, me worry–yes

Chris Farrell Apr 30, 2007

Remember when the 9% drop in China’s stock market toward the end of February rippled throughout the global economy? Well, it turns out that was nothing but a blip. China’s stock market has reached a new record close. The Shanghai stock exchange is up 280% since bottoming out an an eight year low in mid-2005. It’s up 45% year-to-date.

To cool off the speculative fever, China’s central bank tightened monetary policy for the seventh time this year. But so far, the central bank hasn’t been able to dampen “irrational exuberance” among investors. “However, the Chinese market is certainly crusing for a bruising,” writes economist Ed Yardeni in his latest newsletter.

The Chinese stock market is a bubble. To be sure, bubbles aren’t all bad and investor enthusiasm has helped fund the country’s remarkable economic rise. Still, China’s stock market maniacs seem increasingly out of touch. This bubble is primed to burst. Markets don’t go up forever, certainly not when the central bank has decided enough is enough

Of course, I don’t know the timing. But I bet China is the epicenter of the next global financial market crisis.

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