*
No sooner than Lili said goodbye the Shanghai stock exchange crashed. Here we go again, thought Pat, just when it seemed the much-needed calm had settled over global markets. The Shanghai composite dropped another 5.31%, bringing the losses to over fifteen percent since the People’s Bank of China had raised overnight rates the week before. Since the wild peak of August 2007, it had lost two thirds of its value, scuttle-butting along at around the 2000 points level. Monday, 24 June, it hit a low of 1963 points, a level not seen since the Lehman Brothers event.
It was not a good augur for investing in China, but, thought Pat optimistically, a lot of Chinese would want to start hedging their bets by getting money out of the country.
He wondered whether the move by the PboC, which had sent overnight interbank rates to thirteen percent, had been to purge speculative excess, or was it trying to hide a bigger problem?
He did not think it would go much further, his recent experience told the risk of default talked about in the financial press was scaremongering and in reality he should be betting on Chinese markets, if what Lili told him was anything to go by.
Talk of systemic collapse was rubbish, the US was on the rebound, as was the UK. Europe was behind, but the cycles were different. Ireland had not gone bust, neither had Spain or Portugal and even Greece was hanging on.
It was never as bad as it seemed.
It was true that the Chinese problem stemmed from new credit creation, beyond regulatory reach, but shadow banking was nothing new in China, or Asia in general.
It had become a non-regulated mix of special vehicles, trust companies, insurance firms, leasing companies, pawnbrokers, wealthy individuals, family groups and other informal lenders associations, all looking for higher yields. The problem was what would happen if it all got out of control, which was always a possibility. Black swans had the unpleasant habit of popping up in the least expected places, especially if the yuan became an internationally traded currency.
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