Price Bubbles Always Burst: Chinese Stocks Down Over 50 Percent

It wasn't long ago that investors from around the world were piling into Chinese stocks just like they did in the late 1990s with U.S. technology stocks. But like all other price bubbles before it, the Chinese stock market peaked and then collapsed. From its peak close at 6,092.06 on October 16, 2007 the Shanghai Composite (^SSEC) has dropped 54.89 percent as of its June 27, 2008 close at 2,748.43.

Why have Chinese stocks fallen so much so quickly? The primary reason is that they up too much too fast. Using the July 11, 2005 close at 1,011.5 as the starting point of the bull run, the SSE went up 502 percent at its peak in October 2007. That rate of ascent was simply not sustainable.

Similarly, the Hang Seng (^HSI), the index for Hong Kong stocks, has fallen 30 percent from its peak close of 31,638.22 set on October 30, 2007.

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Posted June 29, 2008.