New low for Shanghai stock exchange may spell trouble for Chinese banks

Posted August 18, 2008

The 60-plus-percent drop in Shanghai’s valuation will work its way into Chinese bank balance sheets: Plenty of corporate portfolio punting was undertaken using indiscriminate loans issued by Chinese banks to party functionaries working in corporate executive positions. If you think paying back upside down mortgages reflecting 10-20% in valuations were dynamite for U.S. mortgage lenders, just wait until last years punting loans come due in Beijing…

by J. Christoph Amberger

Baltimore — (TFN): Another day, another post-record low for the Shanghai Stock Exchange. Johnny-come-lately China investors saw the index drop a stunning 130.742 (5.34%) today to close at 2,319.868.

At its intraday low of 2,318.926, this represents a 62% drop below its October 2007 high of 6,124. Apart from gold in 1980, I can’t remember watching an index fall so fast and by this much — ever. Especially not in a country still throwing its big coming out party.

Last Sunday, TFN broadcast our latest Smart Trading video interview with Laura Cadden, who had invited me to check if my opinion had changed on my world view. Unfortunately, it hasn’t. (Watch it here if you’d like to know what I foresee for China.)

What is most distressing at this point is that the decline in Shanghai not simply represents a loss in market valuation — but a very real destruction of Chinese middle class savings (which, as you will remember, were pumped from more traditional savings accounts into trading accounts last year.)

Furthermore, the lower valuations also will work their way into Chinese bank balance sheets: Plenty of corporate portfolio punting was undertaken using indiscriminate loans issued by Chinese banks to party functionaries working in corporate executive positions. If you think paying back upside down mortgages reflecting 10-20% in valuations were dynamite for U.S. mortgage lenders, just wait until last years punting loans come due in Beijing…

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