I was in Shanghai for the past two days and so wasn’t able to write anything on my blog, although it doesn’t seem like a whole lot has happened recently to add to our understanding of the Chinese economy.  The stock market continues to behave poorly, with the SSE Composite dropping 2.6% on Tuesday and 0.3% Wednesday before reversing Wednesday’s losses to close up 0.3% today at 2350. 

The weak rally was driven by higher-than-expected profits among consumer-related companies, although I wonder how much of that increase was caused by a one-off jump in Olympic-related spending.  I guess it is worth noting that once again we are close to the 2300 level, although during my meetings in Shanghai some of the fund managers spoke of 2250 as being the level at which we were expected to see government support.  Who knows?  At any rate they weren’t a particularly enthusiastic bunch.

I am not allowed to be too specific about details, but one impression I got from these meetings is that new equity funds launched in recent months have been supported by some pretty aggressive selling, with high-fee incentives paid to the commercial banks and brokers who are responsible for raising the money.  This is all very impressionistic, and I don’t have concrete details, but I wonder if some of the retail investors who have put money into the funds are fully aware of the risks they are taking.  When salesmen are put under significant pressure to sell new funds to retail investors, and are rewarded with high fees when they do, there is always the risk of salesmen misstating the risks and rewards associated with the fund.

This could be a problem if markets continue to decline, and clearly the possibility of further declines weighs heavily on the administration.  Today in the China Daily there was yet another article (these have become regular appearances in the Chinese press) arguing that a post-Olympic slowdown is unlikely and quoting a host of experts, including inevitably, Lin Yifu, the chief economist and vice president of the World Bank, who believe that there are few risks of a post-Olympic recession.  Still, in the same edition the newspaper had another article called “Economy to face challenges in second half,” in which it warned about the increasing uncertainty:

China's economy has maintained steady and rapid growth in the first half but faces increasing uncertainty for the rest of the year, a senior government official said Wednesday.  “Negative impact on the economy will continue,” said Zhu Zhixin, vice-minister of the National Development and Reform Commission (NDRC), China's top economic planner, in a press conference.