Author  Andy Xie Guozhong

The United States is sliding into recession. Japan seems too. China is tightening aggressively. Oil has soared past $100 per barrel. The stars are lined up for a perfect storm as 2008 begins. Hang Seng Index may drop 20% over the next three months. The market may recover in the second quarter as the Olympic mania affects market sentiment. Before investors can taste the joy of 2008, they must eat bitterness first.

2008 is a turning point in the global economy. The current bull market began in mid-2003: Americans recovered from the '9-11' shock and China recovered from the SARS shock. Both felt a near-death experience and became determined to live it up a bit, just in case. Americans went on a borrow-and-spend binge. The defining picture must be throngs of people rushing through the just-opened doors at Wal-Mart Centers. Chinese threw the money into property and then stock market and watched both rise. The defining picture must be the throngs of people staring up at the tickers screens. The two spent differently but got the same thrill.

Well, every party must end. America's is ending now. China's may have a few innings left but may experience a big hiccup soon as the US burst chills sentiment here and inflation scares Chinese policymakers into taking the away, even though temporarily. The combination may cook up the perfect storm for Hong Kong market.

The bull market depends on rising earnings and cheap capital. The former has benefited from 15% annual growth rate of China's nominal GDP for the past three years and rising share of corporate earnings in the economy due to faster asset appreciation. The macro tightening could take a big bite(吞噬) out of both. The tightening may slow nominal growth rate by 20%. It will reverse the rising trend of profit share in the economy, mainly due to its powerful effects on earnings in the property and financial sector. The growth rate for China's corporate earnings may halve(减半) in 2008, with banks and properties the biggest casualties(损失惨重).

Despite the Fed's rate reductions, the US economy is still sliding into a recession. The credit crisis has exposed the risks of buying into complex Wall Street products. It deters international capital from flowing to the US. Foreign capital has funded the US borrow-and-spend binge. Unless the confidence in Wall Street returns, Americans won't have enough money to spend. It takes time for foreigners to recover their faith in the Wall Street. The Fed's policy couldn't substitute this. Its rate reductions would only make dollar weaker and increase inflation. As a result, stagflation may stalk the US economy for a couple of years.

The US recession will decrease risk appetite among international investors. As international capital still dominates the Hong Kong market, it could see significant outflow. Further, many financial institutions in the US have capital shortage. They may have to pull money out of Hong Kong. Facing a banking crisis at home in 1998, Japanese financial institutions pulled big amounts of money out of Hong Kong. The US financial institutions may do the same in 2008.Would Chinese money come to the rescue? Not soon enough. Chinese money may be flowing back into the A-share market recently. Even though the A-shares are so much more expensive than the same shares in Hong Kong, buoyant local sentiment(群情激昂) still keeps them up. Chinese investors may be irrational. But, there are so many of them that they can keep an irrational market going for a long time. Hong Kong market is just too rational for the comfort of Chinese investors. Hence, Chinese market becomes a safe haven during the international correction.

In the second quarter, international financial markets may calm down, after fully pricing(完全的估计) in a US recession. Chinese money may return to Hong Kong again, to play at a lower level. International investors may also have overcome their fear of the US dragging down China. As the two embrace(两个因素的刺激), the market may fly again(再次飞升), even though the US market remains stone cold(冰冷如石).

The Olympics party may not last long. After the summer, reality may catch up with investors again. Many Chinese companies are concept plays(概念游戏), not lasting franchises(稳定的收益). Some might even be scams(骗子), despite being taken to the market by renowned investment banks. Remember subprime: Big names don't mean much anymore. China's tightening will expose the negative cash flow businesses of such companies. The resulting explosions may affect confidence.

The air in Hong Kong and Shanghai may be squeezed (紧张)soon after the Olypics. The deflating(通缩) process may be painful to many(许多公司). But it would make China's capital markets and economic development healthier. Many 'share gods' (股神)have emerged in Hong Kong and Shanghai. Their 15 minutes of fame are far more damaging(破坏性) than Paris Hilton's: they suck credulous housewives into overvalued shares without the pleasant look to soothe. Worse, they might be talking there own books and could be getting out while talking bullish(一边大谈自己的书，一边大谈牛市，一边全身而退).

Even bubble here goes through the same routine. Investment banks take doggy companies(烂公司) to the market for a fee. Some new faces suddenly don the cover of Fortune Magazine as the riches this and that. When the show stops, most stars suddenly vanish. Some manage to escape into the deep woods of Thailand with some stolen cash. Little people always lose. We seem to be doomed(注定) to repeat the same mistake again and again.