The anxiety in Asia this week after a 6.5% fall in Shanghai stocks on Wednesday contrasted sharply with confidence in Europe and the US.
Developed market investors congratulated themselves on avoiding a sell-off like the week-long bout of volatility that began on February 27, when Shanghai last hit an air pocket and lost 9% of its altitude.
But if European and US funds were cheered by the limited nature of Shanghai’s plunge and the lack of contagion, Asian equity capital markets bankers are worried that the correction may not be severe enough.
Yesterday (Thursday) the Shanghai Composite rose 1.4%, and it was up another 1% by late morning in Shanghai today (Friday).
That pattern echoed the market’s quick recovery after February’s blip — after three months the 9% retreat had become a gain of more than 30%.
Bankers applauded the Chinese government’s announcement on Tuesday night of a rise in stamp duty on share transactions from 0.1% to 0.3%, but doubted that it would be enough to ensure an orderly deflation of the bubble.
"While this is encouraging, this is frankly not enough and only staves off what I see as the inevitable crash in China, along the lines of the Asian markets crash of 1996 onwards," said one veteran Asian equities banker. "When a patient is really unwell, a severe blood-letting is called for, not a few leeches."
Observers believe the government may have to impose capital gains tax on share trading profits or raise rates to secure the 20%-30% correction they believe is needed to avert disaster.