China: the dead cat bounce?

A few weeks ago, at the height of the panic in the Chinese stock markets, a sour joke was doing the rounds: "Last month, the dog was eating what I eat. Last week, I was eating what the dog eats. This week, I think I'll eat the dog." A lot of people have lost a lot of money.

The Chinese government is permanently terrified. It is terrified of climate change, of slowing economic growth, even of a fall in the stock market - of anything that might cause the population to turn decisively against it. When you are running a 66-year-old dictatorship and your only remaining credibility in the public's eyes is your ability to keep living standards rising, any kind of change is frightening.

How terrified is it? Consider its reaction to the recent sharp fall in the two main Chinese stock markets. China has a capitalist economy, albeit a highly distorted one and stock markets are a normal part of such economies. They go up, they go down, and normally governments do not intervene in the process.

The Chinese stock markets have recently been on a roller-coaster ride. After treading water for years, prices exploded in June 2014. Over the next year, there was a 150 percent average rise in prices on the Shanghai Composite exchange, and almost 200 percent on the Shenzhen. Obviously this was not sustainable, especially since growth in the real economy had been falling for years. A "correction" was inevitable.

It came with a bang, on June 12 this year. Since then, prices have fallen 30 percent on the Shanghai market and 40 percent on the Shenzhen. Around $4 trillion in paper values have been wiped out - but so what? Chinese stock prices are still far higher than they were a year ago. Indeed, at an average of 20 times earnings, they are still overvalued...