[simonh]

The Chinese stock market hassufefred rampant manipulation to ramp it up, and is now correcting itself. Even with the steep drops so far it's still well up over the last 12 months, after all. All this means is that those rises were not justified and are being wound down. The government's panicked response isn't helping, and the fall may well be more severe than the economic realities justify, but what's new?

There is no severe immediate risk of a depression in China. Their stock market is relatively very small compared to their economy as a whole and Chinese firms as a whole are nowhere near as dependent on it for raising capital as in western countries. Therefore the ammount of damage any fall in the stock market can do to the Chinese economy is fairly low.

The Chinese leadership has staked a lot of it's credibility and prestige on the rises in the stock market, as evidence of it's good economic management. As a result they, and anyone wantign to curry favour with them, were hyping up the market and blowing air into the bubble as hard as they could. Bad mistake. They'll learn.

[redwood]

I hope you're right. But reading about firms that are raising loans with their stock as collateral. .. shall we say while staying true to your point are perhaps nevertheless even more exposed than your model's worst case. Only time will tell.

[simonh]

Sure, you're right to be concerned, it's no picnic. Some companies will go bust, and some investors will lose their shirts. It will hurt. It's not yet a systemic risk though. Of course the more the Chinese government panicks and tries to manipulate the market back up again, the worse it will get but right now it doesn't have to be all that bad.