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Shanghai's Growth Is Stalling


And it doesn't seem to be going anywhere soon.


Since its collapse in 2008, the Shanghai Index has been in recovery mode; that is until my arrival in late August.

Six weeks ago, I headed off to Shanghai, ready to immerse myself in a country full of growth and investment potential. I haven't been left with a good first impression. The Shanghai Index has plummeted more than 20% since I set foot in the Middle Kingdom.

Unfortunately, I don't think the correction is over just yet.

For starters, the launch of a new Nasdaq-style market dubbed the "Growth Enterprise Market" is causing a liquidity squeeze as capital is being reallocated to new subscriptions. There's also a lineup of new blue chip public offerings on the main boards that will also add to the share glut.

From a longer-term investment horizon perspective, both issues are actually promising. However, this isn't exactly an ideal time for such a rush of IPOs. My conversations with co-workers and the general Chinese public have led me to believe that many are still very weary about re-entering the markets after the 2008 crash.

Thus, new subscriptions will only flood the market as there just isn't enough liquidity to withstand the amount of planned new offerings.

In addition, analysts here are suggesting that China's stimulus package has peaked and that the effects are starting to fade. The National Bureau of Statistics reported yesterday that profits at China's major industrial companies fell 10.6% in the first eight months of 2009 compared to the same period last year. And while the state industry is showing signs of improvement, the private sector is still struggling to recover. Even Premier Wen Jiabao has said the country's economic recovery hasn't reached stability.

Eager as I was to move here and report a booming economy full of promise for international investors, I can't say I'm over-the-top optimistic about the near-term outlook.

While I think there's an abundance of futuristic opportunity -- seeing the growth in person is quite overwhelming -- I do believe there are significant and serious risks that need to be addressed. (Of course, that's a whole other article to be written at a later date).

Even with the recent market downturn over here, many companies such as Baidu (BIDU), Sohu (SOHU), and CNOOC (CEO) have recovered quite well so far this year. Investors who have profited from these gains should take their profits for now as better buying opportunities will likely be presented in the coming weeks.

No positions in stocks mentioned.
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