Solid Growth Is Harder Than Blowing Bubbles

FNCE621

Advanced Quantitative and

Economic Analysis

Topic:

Solid growth is harder than blowing bubbles

Bi Tianming

6 Feb 2016

What’s wrong with China?

How would a slowdown in China affect other economies?

What policies is needed to address the problems you identified?

China Stock Market is turbulent

China's latest stock market selloff — the Shanghai index lost 15 percent of its value in the

past January. In China, its stock markets already use daily price limits (in China, individual

stock prices cannot fall by more than 10% per day), and its marginal investors seem to be

the uninformed, speculative, individual investors (a marginal investor is the one that has

the power to affect market prices). So, the imposition of circuit breakers was not only

repetitive to its price limit system, but it also only served to incite panic rather than to

reduce it. Think about it. China is a place where there isn’t a whole lot of transparency to

begin with. So, if I’m a somewhat clueless individual investor in China, and one day I see

that Chinese regulators suddenly install circuit breakers in fear of a market crash, then

naturally I’m going to panic. And this is what happened. The Chinese regulators now see

it this way too, which is why they recently removed the circuit breakers. On one hand, this

is all comical, but on the other hand, it’s extremely frustrating.

Chinese are not consuming

The Chinese government realizes that it cannot rely on exporting forever for its country’s

income and wealth, so they are trying to shift the country to move toward a greater reliance

on consumption to boost their GDP. But it is simply not happening, at least not amongst

the rising middle-class. This is one reason why the economy is not growing as well as it

has in the past. Most of the wealth is concentrated in few people and most of the people

have spent their whole life on a property which means that they do not want consume or

they cannot consume....