If you have been following the Shanghai composite index, then you might have noticed that the Chinese stock market has exploded. The prices have gone WAY above the purchase price. Even though the Chinese government is trying to project a healthy image of its stock market, is it so?
“Chinese stocks are on an incredible run. But going too high, too fast, is risky”
Not long ago, in the summer of 2015, the Shanghai Composite lost 30% in just three weeks, even though it had gained 150% in the previous year. Investors are concerned whether history will repeat itself. Also, the fact that China is under international scrutiny due to the way it handled the pandemic and the newly issued security law in Hong Kong is causing investors to second-guess their investments in Chinese stocks. The economic impact of the ongoing tension between China and the USA also needs to be considered.
Any stock market goes through some cycles in the short run. Disbelief is the lowest point of the cycle when all stocks are very cheap. Intelligent investors buy stocks at this point because it’s cheap! On the other hand, Euphoria is the peak of the cycle, and China is experiencing it right now. And as we know, this cannot be everlasting. Usually, after such highs, the market comes crashing down. But the hype keeps the price going up, which creates a bubble. Therefore, financial analysts are saying it might be too risky to buy new stocks in the Chinese market now. Rather they are suggesting holding on to the stocks that have already been purchased and maybe sell some of them to take advantage of the soring price.
In the end, we would just say that it’s better not to blindly follow trends. Make educated choices, especially when there’s money involved.