Gong Xi Fai Chai

1. Importance of the Chinese economy vis-à-vis world economy has been confirmed in bold letters.
2. Stock market rout due to the latent fear of “bubble could burst” syndrome.

The Long March has come to a halt. The year of the Golden Pig, a lucky year on the Chinese Lunar calendar has sent the stock markets worldwide to the sty. Stock markets worldwide function only on one principle “give and take” i.e. what the market giveth it also taketh away. “ Enter and Exit ” is your choice and only a choice few have mastered it. Simple research of the stock markets shows that a high rise is invariably and closely followed by a steep fall. Rise occurs when investors go on a buying spree and in order to lock in profits hit the sell buttons. And what happened on the stock markets on 27^th February has been described by market strategists as the “correction we had to have” following seller gains.

Amid fears about slowdown in the Chinese and US markets, the fall was the worst to hit the Wall Street since September 11 2001 and wiped out all of the market gains this year. Across US, Europe and Asia, stock markets fell with shares dropping more than 3 %. Possible triggers for the share meltdown could be :

1. Rumours that China was going to impose a 20% capital gains tax on Stock investments. Since denied by the Chinese authorities.
2. Panic created by China which increased the Cash Reserve Ratio for her banks on Tuesday 27^th February.
3. Former US Federal Reserve bank Chairman Alan Greenspan raised the possibility of a US recession towards the end of this year, unnerving investors.
4. European stock markets took a turn for the worse shortly after the publication of an economic report showing that new orders for US made durable goods had fallen by a much sharper-than-expected 7.8% in January.

Since mid-January markets around the world had been going higher and higher. The Chinese market surged 138% in 2006. Some of that was based on fundamentals due to China’s very strong economy but a lot of it was based on speculation.

The correction was overdue. The stock markets in China were getting overheated after reforms and regulations were introduced last year. For sometime there have been worries that the red-hot Chinese economy could tumble and bubble could burst. This followed a switch in sentiment, with investors appearing to finally heed warnings from regulators that stock prices were vastly overvalued. The fall may not be a one-day wonder and there may be aftertremors.

According to Bloomberg some of the interesting sidelights to the  Tuesday's drama were :

1. The plunge on Wall Street is the biggest one-day fall since the first day of trading after September 11 terrorist attacks.
2. About $600 billion in market value was lost, wiping out all of the year’s gains so far.
3. Dow Jones Industrial Average lost 151 points in a single minute at about 3 p.m. New York time

But it may not all be doom and gloom scenario. The rout is being treated as more of an excuse rather than a signal that something fundamental has gone awry. Strategists expect a correction of between 5 and 10 per cent over the next four weeks. However it appears that the market’s bull run is far from over because the fundamentals remain intact. Therefore Gong xi fai chai, which is a wish for fortune and prosperity in the new year.