air out of the bubble

It appears that bubbles of all sorts around the world are in the process of deflating. China's stock market, probably the biggest bubble of all is doing its part. On 10/16/07, the Shanghai Index stood at 6092 and it represented its peak. For perspective, the index stood at 1161 on 1/1/06. Today, the index finished the day at 3971, a 35% correction so far. Even after this correction the PE of the index is still around 40 which indicates there is still ways to go. The scarier proposition is that if an Enron can occur in the US with its matured capital markets, imagine the veracity of the data in an emerging, unregulated market like China; the real PE could be much higher.

Another bubble - real estate seems to be taking a breather as well. Sales volume in Shanghai on residential real estate have been declining for the past 4 months and the prices have become stagnant. As we see in the US real estate market, it takes a period of declining demand for the prices to eventually follow. We may be at the precipice of the deflation of the real estate bubble here in Shanghai.

The amount of investment that has been poured into China in recent years have really created a possibility that the entire Chinese economy is a bubble. Time will tell whether this is true.

The Chinese people here have all been saying that they believe that the economy will be strong leading up to the Olympics and they are cautious about the post-Olympic days. It looks like this might become a self-fulfilling prophecy.