Market Crash Day in Shanghai

As I write it is Wednesday morning in Shanghai. Last evening, on Tuesday night, my wife and I went to dinner at a local Thai restaurant with three foreign friends, two young Americans and a European. It was 7pm here, and the Shanghai Stock Exchange had already closed after its 9% drop. It was 6am in New York, and the markets there had not yet opened for what would become the 400-plus point drop in the Dow.

As foreigners will, we talked about the goods and bads of China, plus the basic unknowability of how the really important issues will turn out in the long run. The environment: true catastrophe for China and the world, or some nick-of-time avoidance of the worst consequences? The economy: endless expansion, or finally a breakpoint when too many strains are felt all at once (inflation, Gilded Age-style inequalities, dispossessed peasantry, our old friend environmental catastrophe, etc)? The political system: one-party rule as far as the mind can imagine, or the kind of liberalization that many Westerners assume is "inevitable" once a country develops a prosperous middle class? The Beijing Olympics: glorious coming-of-age event, or potential source of screw-up and loss of face? Environmental catastrophe plays its part here too: yes, they can close the factories and ban the cars for weeks leading up to the Olympics, but will that be enough to fix the air in Beijing? At least the answer to the Olympics mystery will be known relatively soon.

What we didn't talk about was that day's crash on the Shanghai Stock Exchange. I wasn't even aware of it, having been out all day, and I'm not sure anyone else was either. I had decided early on that the ups and downs of the Chinese stock exchanges were interesting mainly in the way the weekly Powerball prize level was in the United States. That is, the market activity said something about who was making money and about this era of China's enrichment -- rather, this era of some Chinese people becoming very rich. But it was connected only hazily to what the rest of the world would consider "real" economic factors.

A little over a year ago, the Chinese stock markets were down even though the Chinese economy boomed. The reasons had something to do with corporate corruption scandals and the realization that the markets were the farthest thing from "transparent." Over the last few months the markets have soared -- again with at best a loose connection to changes in economic fundamentals or specific companies doing well and poorly.

Ten days ago, China welcomed the auspicious Year of the Pig. Whether this is the super-auspicious Year of the Golden Pig or merely the Year of the Fire Pig is apparently up for debate, but it's OK in either case. Five days ago, on the Fifth Night of the new year, the city rocked with explosions from roughly 9pm to 2am, as families stayed home and set off endless strings of firecrackers to welcome the God of Wealth into their homes. Apparently the noisier it is, the more welcome the god feels. Two days ago, the Shanghai Composite index closed above 3000 for the first time ever, an emotional threshold comparable to when the Dow crossed 10,000. A mere 24 hours ago, the front page of the English-language and state-controlled Shanghai Daily proclaimed, in banner type, "Stocks Smash Record as New Year Dawns."

That same Shanghai Daily has in the same prominent space this morning: "Wheat Scientist Wins Top Research Honor." Down in tiny print at the bottom of the page is a photo caption pointing to an inside story about the previous day's market collapse. Both the Chinese and the English sites for the People's Daily newspaper give the same minimalist treatment to the market news. (The nationwide English-language China Daily, also state controlled, to its credit runs the market story at the top of its front page, although its web site is understated like the rest. The Shanghai Daily's web site gives the news the prominence the physical paper so notably avoids.)

[Updated note: I mention the English language press to indicate what's being presented to the outside world, not as as an indication of domestic Chinese concern. The local TV news last night was all over the story.]

That the Shanghai market should have wild ups and downs is no surprise. The Powerball total bounces around a lot too. The surprising thing -- and worrisome, I assume -- is that the lottery-like behavior should have influenced markets across the world. Or maybe the Shanghai market is more typical of world exchanges than I had thought?

Later today we'll go to one of the many neighborhood parlors where ordinary Shanghainese people can gather to watch real-time market reports. These little joints remind me of OTB parlors in New York City, in more ways than one.