Not long ago a Chinese official had remarked:'The subprime market is very complicated. Chinese banks are not nearly sophisticated enough to make these sort of mistakes.' But Chinese joy at US misfortunes has been shortlived. Their own mainland stock market has fallen almost 50% from its peak reached in October last year, and the government is under pressure from investors to stop the slide. After all, if Bernanke can go out of the way to do it in the US then why can't their government do the same, they want to know.
Mr. Bernanke may deny that he is acting to defend the stock market and is only trying to prevent a general financial meltdown, but the fact is that most people are convinced that this is one asset class that he has to protect at any cost. If this were to slide like the housing market the results for the US economy, at this stage, could be disastrous.
In China the problem has already caught the attention of the legislature, the National People's Congress and was discussed in its meeting in Beijing last month.The government in China wields enormous influence over the stock market.This time last year, when the stock market was booming , the government tried to cool things down by increasing the stamp duty on each share trade by 300%.When this failed they flooded the market with jumbo sized new share offerings. Suddenly the market has collapsed, just as the subprime market collapsed in the US because Greenspan tightened too far and Bernanke was slow to cut rates.The Chinese Government is reportedly at its wits end to find a way to revive the stock market.All it can do at the moment is to cut the stamp duty on share trading and little else except wait for the US economy to recover.If the US economy goes into recession as feared, it will mean downward pressure on exports from China and on economic growth.Chinese exports are already under pressure because of increased costs of production due to higher commodity prices and a rise in the value of the yuan against the US dollar.
However there is a widespread belief amongst Chinese investors that their government will do its best to revive the stock markets before the start of the Olympic Games scheduled for later this year. They feel that it would not want the games to take place against a backdrop of economic and political troubles.