If you look at what happened to the Chinese stock market since last summer, you can see that the huge drop in the Shanghai stock index has a lot to do with investor sentiment and policies, rather than the fundamentals of the economy. When you have even a small portion of 1.3 billion people buy stocks, it’s enough to push the stock market up like crazy.

China’s economy is still growing at 10+% annual rate, but small investors no longer see the stock market as the guaranteed way to get rich quickly after the government started to curb the crazy stock market last fall. Chinese stocks, as well as stocks traded in Hong Kong, peaked in last October because the government hinted in the summer that it will allow mainland investors to buy directly stocks listed in Hong Kong to diverse the money, but later changed its mind to postpone such plan indefinitely. I guess the government realized at that time that this won’t be a good idea because it can only artificially inflate the Hong Kong market. Both markets started fall and continued to fall after the government started to require banks to increase their reserves to battle inflation.

Most small investors in China don’t see the stock market as the place to build wealth slowly. Rather they see it as a way to make quick money. They can enter the stock market all together, and they can also leave it all together. Right now, nobody wants to buy stocks any more. But then the stock market is functioning more normally.

I don’t think the Olympics will change anything in terms of performances of stocks. If there’s any connection, then the market should go up now instead of losing some 60% in a little over half a year. If China’s economy can keep going at 10%, then we should still buy Chinese stocks and ETFs