Almost as soon as these mind-numbing statistics came to light, panic replaced euphoria among the Chinese retail investors virtually overnight. A month ago, Chinese retail investors brushed aside any suggestion that U.S. markets could impact equity values in China. Many U.S. investors also believed that the government would do nothing to damage confidence in stocks before Beijing hosts the 2008 Olympics next summer. Don't you believe it. Although the Chinese government's five interest rate hikes this year have done little to slow the market momentum, in recent weeks, regulators ordered commercial banks to freeze lending activities through the end of the year. And on Nov. 15, the Chinese government issued a report warning that a U.S. recession could be "devastating" to China's manufacturing sector. These developments -- combined with the impact of global jitters to which Chinese investors thought they were immune -- is already making tens of thousands of Chinese day traders call it quits.
And the impact of the collapse of China's stock market could be a lot worse than previously thought. Merrill Lynch estimates that Chinese retail investors -- up to 150 million people -- have sunk 22% of their capital into the stock market. Say the stock market drops by half (it's already down about 20%) and Chinese urban households will lose about 20% of their overall net worth. That makes the impact of the housing collapse on net worth in the United States look like a rounding error. Pundits estimate that a 50% decline in the stock market might lop 1-1.5% off China's double-digit percentage GDP-growth rate.
Today's conventional wisdom has it that China is somehow different from Japan, the Internet, or any other financial bubble. But the recent correction in the markets reminds us yet again that China is no different from the other speculative bubbles that preceded it. It's also worth recalling that international investment doyen John Templeton called the words' "this time it's different" the "four most dangerous words in investment." Templeton also made his quickest fortune shorting the biggest names in the Internet in 1999. I wonder whether he is doing the same with China.