The casino known as the Chinese stock market

I have repeated this point many times but here is another look at the Chinese stock market and how it resembles a casino. This story, about IPOs, comes from The Globe & Mail:

The China Securities Regulatory Commission quietly shut down new stock offerings nearly a year ago, after uninhibited speculation fed a freefall on the country's stock exchanges, and the demise of Lehman Brothers warned of darker economic times ahead.

This June, with China's economy growing on the back of government spending and more cash infusions to continue that growth, regulators reopened the field to IPOs, armed with a new set of rules designed to limit speculators' ability to cash in.

The scene on China's benchmark Shanghai composite index before 2008 was something akin to a Wild West of stock markets. Eager, fast-growing companies launched IPOs with spectacular results, grabbed up by an equally eager public for whom the stock market represented a new kind of excitement: gambling, only with seemingly guaranteed profit.

The 76 companies launching IPOs on mainland China in 2008 saw prices leap an average of 152 per cent, according to Bloomberg. The year before, the average was even higher - 199 per cent, based on 109 companies' launches, according to HSBC.

Among the most dramatic was an offering by Guangzhou Tech-Long Packing Machine Co. in January 2008, which saw its value jump 404 per cent on its first day on the Shenzhen market.

But like many other stocks with brilliant beginnings, the Guangzhou machine company then had its worth plummet, by 71 per cent over the next eight months.

...

But still, there are warnings that too much liquidity is inflating China's stock markets, along with real estate and commodities, and that this is creating "bubbles" that will, inevitably, burst. "The potential risk is that a lot of liquidity goes to the asset market," Bank of China's vice president Zhu Minsaid. "So you see asset bubbles in commodities, stocks and real estate, not only in China, but everywhere."

The government has been attempting to rein in the wild beast known as the stock market for years. The question is, can they do it? So far they have been unable to neither prevent a bubble from developing, nor to stop a bubble from imploding. Wrong on the way up; and wrong on the way down ;)