In 2001 when Beijing was awarded the privilege of hosting the Olympic Games there was no doubt in anyone’s minds that, with the eyes of the world upon them, China’s authorities would go to great lengths over the following years in order to boost its economy and strengthen its infrastructure. With the games in full swing, clearly China has achieved its objective of presenting a world-class event. The upbeat and optimistic mood surrounding the Olympic Games has, however, not carried over to China’s stock market, which is continuing in its downward trend since it reached a peak in October 2007.
The Shanghai Composite index has declined by more than ten percent since the Olympic Games opened, fueling investors concerns that the initial signs of prosperity had coincided with a world-wide bull market and what had looked like an economic revolution in China may not be sustainable. China’s stock exchange has already earned a reputation for being one of the worst in the world and it is becoming evident that it is also prone to the volatility of world markets.
There are a number of analysts who feel that investors should not be unduly alarmed by this downward trend, as it is most likely a natural cycle of cooling down after a period of extreme growth in what is considered to be an emerging market. However, China’s market is a lot more resilient than it was a decade or so ago which, although not making it immune to reacting to crisis situations in global markets, does hold the promise that it is capable of bouncing back.
The driving force of China’s rapidly growing economy has been an internationally competitive export sector. Bearing in mind that China’s derivatives and corporate bond markets are still in their infancy, more progress needs to be made for the country to develop a healthy financial system that is capable of taking the risks necessary to carry it past the initial economic boom that it experienced. The banking sector will no doubt continue in its efforts to develop and firmly establish both its lending and risk-assessment capabilities.
Although investors should not see China’s markets as a short-cut to wealth, this does not mean that it is not worth investing in. High risk often translates into high returns. With a population exceeding 1.3 billion and an annual salary increase of around ten percent, there is a lot of money starting to circulate in China, money that the patient investor may very well benefit from.
