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Old Saturday, May 19, 2007
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Taming the dragon

CAPITALISM with Chinese characteristics is how Beijing's high command describes its economy. Which must make its stock market a bubble with Chinese idiosyncrasies. The bubble part is familiar enough.

The market locals invest in keeps charging into uncharted territory, last week vaulting over the 4,000-point level for the first time. After a 130 per cent gain in 2006, the Shanghai index is already 50 per cent up this year. Stupendous gains mean silly prices: bog-standard manufacturers are on dotcom valuations.

What makes this bubble distinctive is its newness. Many millions are encountering shareholder capitalism for the first time - and they want in on it. A million share-dealing accounts were opened on April 30 alone, according to F&C fund managers, more than the whole of 2005. The problem of employees trading in work time is such that businesses have been forced to introduce fines.

A national headache to be sure but, like nearly everything else made in China, it can be exported.

In February, a mere hint from Beijing that it might try to rein in markets knocked 9 per cent off Shanghai stocks -- and panicked Wall Street into its biggest one-day slide since 9/11. The link is more than psychological. As traditionally happens in bull runs, investors are putting more money into exotic places.

The same thing preceded the Asian financial crisis, which began 10 years ago this summer. That was sparked by hot money, domestic and foreign, flooding into relatively primitive markets and causing wasteful over-investment. Only Dr Pangloss would see no similarity between then and now.

This is not to say the bubble will burst soon. After all, China's economy is still growing at an extraordinary 11 per cent a year. And policy-makers would hardly want a market meltdown to precede the Beijing Olympics next year.

––The Guardian, London
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