As to whether this is logical or not, we will not investigate, but the fact of the matter is that many traders are looking to the Shanghai bourse for global sentiment clues.
As we wrote last week, one analyst in the Chinese government gave a rare and worrying insight into how much of new bank lending was being used for the buying of stocks and property rather than for traditional investment purposes. This obviously had the effect of inflating prices but with this type of lending now being restricted, there is less new money to flow into the market and therefore we may see more of the 7% drops in the stock market which we saw yesterday.
It seems sometimes that the entire financial market is one great big bubble which has existed and thrived for years on the creation of new credit rather than new productivity. We saw last year that there were huge sums of money which couldn’t be repaid and were ‘lost’. Now after the massive global intervention and stimulus spending, we are back to the same old routine. Unfortunately, once the money printing and stimulus spending is over, we will return to the same if not a worse predicament.
