Opinion

It’s risky business investing in China and India

Add liquor, blackjack tables and slot machines, and the trading floor of the New York Stock Exchange begins to look an awful lot like a Vegas casino: thousand-dollar suits with glittering, rabid eyes, glazed over from sleeplessness, stress and the prospect of striking it rich.

But the NYSE is, in fact, not Caesar’s Palace, and the economy deserves respect. So, on February 27th, in the spirit of Adam Smith’s invisible guiding hand, the stock market decided to purge itself of the gamblers.

First, the Chinese stock market plummets 9%, the sharpest drop in a decade. Frenzied investors with stakes in China jettison their stocks. Panic-selling begets panic-selling and globalization aggravates the domino effect, resulting in worldwide mass hysteria. The Dow Jones Industrial Average falls 416 points, headlines scream “CRASH!” and the word “recession” is on everyone’s lips.

This debacle was catalyzed by utterings from two sets of lips. The first belongs to Cheng Siwei, Vice Chairman of China’s highest legislative body, who hinted at raising interest rates to prevent China’s economy from overheating. The second belongs to Alan Greenspan, ex-Chairman of the Fed, economic genius and naysayer. In his opinion, stabilizing corporate profit margins are harbingers for an overdue recession. On that cue, investors bailed on their riskiest bets.

Analysts are categorizing what happened on February 27th as a stock market correction, defined as a temporary dip in stock market prices that brings overvalued stocks back to a level closer to their actual value. Intelligent investors realize this, and with a shrug, are content to cut their losses in their diversified, well-hedged portfolios. The investors who sustain third-degree burns from the stock market correction are the gamblers.

Whether Mr. Greenspan is correct or not in his prediction of a recession, it is notable that the economy has been suspiciously sanguine lately. The hype surrounding India and China’s burgeoning economies couldn’t last, and with good reason. China has been tinkering with its political character, trying to reconcile its communist beliefs with its capitalist ambitions. In the face of political upheaval, companies that have invested billions in China could find their assets seized by the government without warning. India hasn’t invested nearly enough in infrastructure in past years to support the rate of economic growth it is currently experiencing. Without reliable highways, airports, running water and electricity, something’s got to give. None of this is new information, but after February 27th, people are taking a long, hard look at their investments.

The stock market correction is like a light dose of antibiotics for a feverish marketplace: it weeds out the impetuous speculative investors who overvalue stocks in the first place, leaving the resistant, serious investors to flourish in a more stable, albeit bearish marketplace.

It is such market mechanisms that prevent blackjack tables, bars and slot machines from being installed on the NYSE trading floors.

An interesting side-effect of February 27th: since investors are now more wary, they are pulling capital from risky China and India and investing it in the US, the safe haven for business ventures. As they say, the house always wins.

Priyanka Timblo is a junior majoring in economics. She may be contacted at p.timblo@umiami.edu

March 30, 2007

Reporters

The Miami Hurricane

Student newspaper at the University of Miami


Around the Web
  • Miami Herald
  • UM News
  • HurricaneSports

While the University of Miami has just three Class of 2019 oral commitments on offense, the Canes ha ...

Gerald Willis’ monster season has earned another piece of national recognition. On Monday, the Miami ...

It hasn’t been a great few weeks on the recruiting trail for the Miami Hurricanes with regards to of ...

A six-pack of Heat notes, leading up to Heat-Lakers on Monday night: ▪ In the days before one of his ...

A six-pack of Canes notes on a Friday: ▪ UM coach Mark Richt hasn’t yet given any indication to the ...

Most UM Debate Team members devote 10 to 15 hours of preparation for each tournament. ...

National Geographic connects with the University of Miami to empower the next generation of storytel ...

Following national recognition for its French production of Cinderella, the Frost Opera Theater is d ...

Several UM art students are getting real-world exposure during a highly anticipated – and attended – ...

Over the past several years, more and more students are using UM Libraries as a study place, a meeti ...

Gerald Willis III added to his postseason awards list, picking up second-team All-America honors fro ...

Following its longest break of the season thus far, the No. 25/23 Miami women's basketball team ...

Miami head women's tennis coach Paige Yaroshuk-Tews announced Friday the signing of two players ...

After a six-day layoff, the No. 25/23 Miami women's basketball team will be back in action Sund ...

University of Miami redshirt senior defensive tackle Gerald Willis III was recognized for his outsta ...

TMH Twitter
About TMH

The Miami Hurricane is the student newspaper of the University of Miami in Coral Gables, Fla. The newspaper is edited and produced by undergraduate students at UM and is published weekly in print on Tuesdays during the regular academic year.