China in Stock Market Bubble Madness

I browsed headlines on the Financial Times website last weekend. I like Financial Times and The Economist magazine because they provide a global perspective which publications in the U.S. often lack.

What caught my attention was this article: Chinese investors in share-buying frenzy (Financial Times, April 18, 2007). The Chinese stock market sky rocketed last year and the rise continued this year. Everybody in China came out of the woodwork opening up brokerage accounts buying stocks. Here’s a quote from the article. Emphasis is added by me.

“In the last week alone, more than 1m new accounts have been opened, taking the total for the last four months to more than 10m — greater than the previous four years combined.

… …

The rush to join the Chinese stock-buying frenzy comes after the market rose more than 130 per cent last year and a further 40 per cent so far this year.”

Sounds familiar? In the late 90s here in the U.S. we had all kinds of people abandoning their day jobs and taking up stock trading. The end of that episode wasn’t pretty. Now we are seeing the same scenes playing out in China. The madness always starts after the market had fantastic returns. You wonder where these people were before. I searched around and I found some other news reports about the same phenomenon. They bear scary resemblance to what happened in the U.S. 8-10 years ago. All emphasis in the quotes are mine.

The people’s republic in the grip of popular capitalism (The Economist, April 26, 2007)

“Bunches of small investors, ranging from students to pensioners, crowd around computer terminals to carry out their trades, keeping an eye on the prices as they flicker across big electronic screens.

… …

So many employees are spending their time trading stocks online that some companies have introduced fines to deter them. But many continue surreptitiously trading and sharing tips through e-mails, instant messaging and texts.”

Oh great, everybody gets rich from the stock market. What’s going on? Read on …

Chinese Citic Bank Shares Jump (Associated Press, April 27, 2007)

“Shares in Citic Bank, China’s seventh-largest lender, jumped 96 percent in their debut Friday on the Shanghai Stock Exchange, living up to expectations in the record-breaking market.

… …

A steady stream of IPOs by elite state-run companies and banks has coincided with a surge in demand from retail investors flooding into the mainland stock markets in Shanghai and Shenzhen as share prices continually breach record highs.”

Chalco’s Shanghai Stock Gains Threefold on Its Debut (Bloomberg, April 30, 2007)

“Aluminum Corp. of China Ltd. shares surged as much as threefold on their first day of trading in Shanghai, buoyed by a rally that’s made the nation’s stock market the most expensive in Asia.”

Hmm… IPOs doubling and tripling on the first day of trading. More IPOs jockeying for cashing in from the craze. Sounds familiar? Not too long ago in the hay days of the dot com bubble in the U.S. we had VA Linux IPO up nearly 700% on the first day. Maybe a Chinese IPO will beat that record soon.

Usually I don’t care much what people do in another country on the opposite side of the globe. But we are in a globally connected world now. A 9% correction on the Chinese stock market in February caused a 400-point drop in the Dow. The Chinese market is 25% higher now than where it was before that small correction. How will a 20% correction in China affect the U.S. market? We will have to wait and see.

If the U.S. experience 8-10 years ago is any guide, we know the bubble can get larger beyond anybody’s imagination over several years but if it gets too large it eventually bursts. I don’t know what stage this Chinese bubble is at – just starting or at an advanced stage — I just hope that the ripple effect of its burst won’t be too bad. We will have to see how this plays out in the next few years. I have a very bad feeling about this, although I understand that the prospect of doubling or tripling one’s money overnight is very enticing. People will get hurt, especially people who can least afford it.

See All Your Accounts In One Place

Track your net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital.

FREE E-mail Newsletter

Join over 3,000 regular readers and get new articles delivered to you automatically by e-mail:

No spam. Unsubscribe at any time.

Comments

  1. Anonymous says

    Have you seen any mention of the average market P/E ratio in China? I’d also be worried if loans are financing a majority of stock purchases in China.

  2. TFB says

    Shenzhen Stock Exchange, one of the two stock exchanges in China, shows the average P/E = 47.6 as of today. Crazy, huh? I can’t find similar stat for the Shanghai exchange at this moment.

  3. Politicom by cfs says

    We are back to the future here and I see a LOT of investors jumping on the China bandwagon. China’s Irrational Exuberance. Fasten your seat belts.

    cfs

  4. Shadox says

    Yup. I draw two conclusions:

    1. People around the world are the same: i.e. irrational, greedy and move in herds;

    2. History repeats itself endlessly…

Leave a Reply

Your email address will not be published. Required fields are marked *