After almost doubling for the year, the exuberant Shanghai stock market suddenly crashed by almost 8 per cent before closing 5 per cent down on Wednesday.
As I write, the Shanghai Composite Index is up about 1 per cent after opening bell, staging a technical rebound after yesterday’s horrendous sell-off.
Much has been published in the past few days over the vast inflow of hot money into the region, especially China. I had also written on the subject in The Straits Times yesterday.
This huge deluge of liquidity has been further exacerbated by massive lending by mainland banks since November last year when China unleashed a huge financial stimulus programme to fight a flagging export drive which threatened to derail its economic growth.
It is not surprising to find some of this borrowed money making its way into the Shanghai market which was the worst performing bourse last year.
But in the subsequent buying frenzy, share prices rose so high that many are worried that a fresh asset bubble is being blown in China.
The leakage of hot money out of China has also propelled Hong Kong and Singapore sharply higher.
After all, traders reason the valuations of these two Asian financial centres must rise to catch up with Shanghai’s soaring prices – even though their open and vulnerable economies are still coping with the aftermath of last year’s financial crisis.
So what should investors do under such circumstances ?
The rally is largely driven by a huge surge of liquidity coasting through the region. For those tracking the market full-time, there will be plenty of trading opportunities, as traders try to guess which way the hot money will move next.
Last year, crude oil experienced a similar liquidity-drenched surge which propelled its price to a record high of US$148 a barrel in July. It subsequently collapsed to a mere US$36 five months later, as the world economic situation turned sour again.