The China Effect

The Chinese stock market is volatile, but offers  great opportunity for growth. The market has fallen back by 20 % in the last month - but gained over 60% since the beginning of the year. Getting your timing right in the short term can be a hazardous game when entering this  market in particular. Time is the only way to help smooth out the process, and therefore belief in the long term is paramount.  Funds should be phased into the market to try and reduce risk. But at the moment we are in very extraordinary times - and it may be wise to steer clear.

The reason - under orders from the government, China's banks have flooded the economy with new credit this year, advancing more money in the first six months than the total for 2009.

It is the biggest wall of money since the People's Republic of China was founded in 1949. The loans are part of a stimulus package to spur domestic investment and consumption and help the economy through the financial crisis.

However, a significant proportion has been diverted into shares and property, with the Shanghai Stock Exchange rising 60% since January.

Several economists believe a large part of the government's 4 trillion yuan state aid package has also failed to reach the "real" economy. This means much money has gone into speculation - so the china market looks set with a probable bubble in the near future.

For the time being we woudl suggest staying clear of this market though watching it for potential recovery in the near to medium term.