kwyml

To say that China has no regulations is not true at all. By joining the WTO, China has agreed to abide by a lot of regulations. Watchdog groups are constantly reviewing labor practice & whatnot. You will hear about it from these people if China has no regulations. As a matter of fact, China has tons & tons of regulations in many areas, what is lacking, though, is enforcement, this is not to say that there is no enforcement at all. China is a huge country with 1/5 of the world's population, everything needs to be done in a huge scale. Many in the west under-estimated the enormity of scale in the challenges that are facing China.

The volatility of the China stock market is not an indication nor proof of the lack of regulation in China, simply because the concept of short-selling a stock is novel to many Chinese. I'm not sure if options trading is practiced there (excl. HKSAR) Also, I do not think anyone can short a stock in China the way Americans do in this country. Remember, China is still a country where improving literacy is still a WIP, many speculators are farmers, workers, housewives..., people who do not know anything about technical analysis or financial analysis...they buy stocks simply because their savings in the bank do not give them a good enough return to keep up with inflation, & inflation is a problem in China. When you have that many people buying stocks en mass (remember 1/5 of the world population), coupled with the lack of short-selling, you will have explosive growth in stock prices. What drives down the prices of stock now is the threat of government intervention in the form of taxes on gains & through administrative measures to limit investments in certain sectors of the economy to prevent it from over-heating.

The wide swings in China stock markets are due to many factors, some of them are: 1. US, European hedge funds are unwinding their positions due to liquidity problems they faced back home, i.e. the subprime crisis. 2. The write-downs of investments by some Chinese banks due to their holdings of American CDOs, essentially toxic wastes that were sliced & diced & repackaged as investment grade securities. That causes a crisis in confidence in the investing public. 3. Good old shortings by those who are able to do it in their own countries, remember, we have a lot of China ADRs traded in the U.S. & European markets.

Another point I wanted to add is that China has excessively restrictive rules about allowing companies to list in the stock markets, causing many smaller firms (non SOEs) to list overseas thru reverse mergers. The companies that are listed in the China stock markets are only a very small fraction of what's available in the economy. The China stock markets are unrepresentative of what is going on in the larger economy.