Phil McDThe Shanghai Composite Index (^ssec or peaked at 6124 in October of last year. Since that time it has fallen to about 2500, a drop of about 58%. Yesterday it dropped about 5%. For perspective this decline is almost twice as great as the roughly one third decline in the US in the 1987 crash. Yahoo! has  a one year chart of the damage.

It is noteworthy that this decline comes at a time of great national pride - the coming of the Olympics to China. But in a sense this may be part of the problem. In a clear display of where Chinese governmental priorities are they shut down many factories and production in order to mitigate their extreme pollution problems. Chinese pollution is thought to be the worst in the world. So it was a classic Chinese act to save face at the expense of making money. It also sends the clear message that China's new found capitalism is expendable if it embarrasses the regime in any way.

The attempt to curb pollution had several effects on world wide markets. China's import of crude oil fell in July. This coincided with the recent all time top in crude and subsequent rapid decline from 145 to the recent 112 area. China is the second largest importer of oil in the world. It is clear that the Chinese factory shut down has had significant worldwide implications. But presumably it is only temporary.

The Olympics end August 24th.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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