This week it has been difficult to avoid news about the Chinese stock market crash. On Monday the Shanghai Composite Index fell by more than 8% and over the last three months it’s down by more than 30%.
However, is this really all that surprising? I don’t think it is.
Consider this: In the 12 months to June, the Chinese stock market grew by more than 150% which is, quite frankly, ridiculous.
If history teaches us anything about stock markets it is that when prices go up much faster than the earnings and dividends of the underlying companies, it does not usually end well.
What’s happened to the Chinese stock market recently is a movie we’ve seen many times before, and this one has much in common with the Railway Mania of 1843-1845…