Chinese stocks headed for a melt-down?

A case of stock fever for Chinese investors
Millions of first-timers are getting involved in the frenzy as Shanghai's main market gauge continues to post eye-popping gains.

China is in the grip of stock market fever. Shares are changing hands in record numbers as first-timers pour in new money. Some are mortgaging their homes or dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."

This year's 50 percent surge in the main market measure, the Shanghai composite index, comes on top of a 130 percent increase in 2006. The market shrugged off a one-day drop of nearly 9 percent in late February that set off a decline in stocks around the world.

Stock prices are 30 to 40 times earnings, an unusually high ratio for many major markets, which some say makes them unrealistic.

"We are opening 40 to 50 new accounts a day," said Zhang Jun, deputy manager of the Tiantong Securities branch. "Six months ago, it was four to five a day."

Many readers wonder what Europe and China’s economies have to do with the U.S. Now that the world is flat (economically speaking) it has a lot to do with it. Notice the section of the above article I highlighted in red. - A sudden one day slide in the Shanghai market led a rapid drop in world markets. This should not be regarded lightly. It is beginning to look like another legendary bubble in world history, only with wider ramifications.

China has a housing bubble, like most of the rest of the developed world right now, and their stock market along with other world markets is heading in the same direction. Ad to this private equity and derivatives fueling world wide mergers and acquisitions at a break-neck pace, could we be witnessing the makings of a perfect financial storm?

Average Chinese are notorious gamblers and tend to trust luck over research, and now they are lining up for their chance to throw the dice on the Shanghai stock market as if it were a craps table. It’s ‘Tulip Mania’ all over again, and if they crash and burn, it will have a very bad effect on the rest of the planet.

Vern