Conclusions
The expanding role for China’s asset markets, which has been accompanied by ongoing interest rate liberalization, is a most welcome development. Given that these markets are still at a relatively early stage of development, however, risks of excesses remain high.
It is to be hoped that the government will maintain its recent cautious approach to dealing with these issues - and avoid the kinds of drastic interventions that were associated with such large fluctuations in the nation’s bond and real estate markets, as well as stock markets, in the past. With regard to the share price advance that began at the end of 2005, the relatively low levels of the H-share discount relative to its own past history did not seem to offer any initial proof of overly bullish sentiment on the part of local Chinese investors. As shown in Arquette, Brown, and Burdekin (2008), comparison with New York trading prices of Chinese firms yields similar conclusions. Whereas it is still quite possible that overexuberance began to emerge in the midst of the huge increases in trading volumes seen in 2007, this certainly does not seem to have been true during the large gains enjoyed on the Shanghai Stock Exchange in 2005-2006.
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