Wikinvest Wire

The China stock bubble is back

Monday, August 03, 2009

It hasn't taken long for the global financial system to begin creating new and, perhaps, even more dangerous bubbles in the aftermath of last year's market shellacking. If this story in the Associated Press is anywhere close to being an accurate portrayal of the mood in China, we're in for quite a ride in the period ahead.

China's stimulus-fueled stock boom alarms Beijing

The middle-aged crowd in the packed Guosen Securities office jostle around buzzing printers that spit out receipts for their share buys, hoping to cash in on China's stimulus-fueled stock market boom.

"The central government has to fulfill their promise of 8 percent economic growth," said Wu Jun, 62, a retired civil servant who invested part of his life savings of 50,000 yuan ($7,300) and lives on a 2,000 yuan-a-month ($290 a month) pension. "They'll come up with measures to keep the market in good shape."

But while investors expect the market — up more than 80 percent this year — to keep rising, Chinese leaders are alarmed. They worry that too much of the $1 trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.
We'll see soon enough how adept the Chinese government is in dealing with all of this.

Stocks in China do not have a recent history of anything resembling a "leveling off" at some reasonable valuation - it's either straight down (i.e., 2004-2005), straight up (i.e., 2006-2007), straight back down (i.e., 2008), or straight back up (i.e., 2009).
IMAGE What comes next in this sequence should be obvious, however, its timing is anything but.

What should be alarming to anybody with a passing interest in China shares is that the anecdotal accounts of what's going on today sound exactly like what was heard back in 2007.
Economists say as much as 15 percent or 1 trillion yuan ($145 billion) of that money has been diverted into stocks and real estate despite government rules that say banks should lend only for productive investment.

The Finance Ministry says it found some companies played the market with money borrowed for stimulus projects. It gave no details but Chinese companies frequently are accused of violating China's already lax financial controls by diverting money from borrowing or their core business into stocks in hopes of making a quick profit when the market is rising.
Thousands of investors have jumped into the market. The number of new trading accounts soared to a weekly record of 108,932 last week, according to the Securities Depository and Clearing Corp., an arm of China's two stock exchanges.

The corporation did not report a total for the number of individual Chinese investors but said they owned 127.8 million trading accounts as of the end of June — the equivalent of one for every 10 of China's 1.3 billion people.

The government is trying to put the brakes on lending without knocking down stock prices.

China's bank regulator spooked investors last week by issuing a statement reminding institutions not to finance speculation. But after that caused the market to plunge by 5 percent, the central bank issued its own statement promising investors its "relaxed monetary policy" would continue.
Wang Zhijun, a 58-year-old retiree, calls himself a market veteran and says he lost more than 10,000 yuan ($1,400) in the last stock plunge. He said he is more cautious this time but exuded optimism about the market benchmark's continued rise.

"Maybe next year it can go as high as 8,000 points," or more than double the current level, Wang said as he joined the throng in Guosen Securities. A friend standing nearby said that was unlikely, and Wang shot back, "5,000 at least."
This is not likely to end well, though it may take quite some time to discover that...

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Anonymous said...

It seems they're far more willing to let things go bust. That is a big difference. The other big difference is they endured the Cultural Revolution only 40 yrs ago which was worse than our 1930's depression.

Ted S. said...

I think Faber had it right a week or two ago when he said that a nice rebound from depressed levels is turning into something that will "totally collapse".

Tim said...

I just came across this from Andy Xie in China Digital Times

"Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

[...] In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis."

Aaron Krowne said...

"Meet the new bubble; same as the old bubble" ?

However, I think something materially different is going on this time: the bubbleosity is more solipsistic than before -- being more reliant on government-driven credit (which, in the US, is so concentrated, half of the trading is courtesy of Goldman Sachs by itself).

This can't be good.

Tim said...

Solipsistic indeed.

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