Chinese stocks: When mispricing becomes more important than pricing
Years of suppressing the cost of credit through central-bank imposed near zero interest rates has led to the mispricing of anything that depends on credit. The list is long and includes real estate because mortgages are central to its purchase; oil because cheap bank loans and low bond rates financed otherwise uneconomic deposits of tight oil from deep shale deposits in the United States; natural gas in the United States for similar reasons; stocks and bonds because large investors often borrow to buy them; and cheap Chinese consumer goods made more and more available by cheap finance to build the factories that produce them.
The effect is not uniform, that is, cheap credit tends to make some things go up by stimulating demand for them such as real estate, stocks and bonds–while making some things go down such as the price of oil and natural gas because U.S. drillers got cheap financing which encouraged overproduction.
Which brings us to the curious historical irony of a nominally communist regime in China using public credit and regulatory maneuvers to reverse the trend of a crashing domestic stock market. The Shanghai Composite had been down 25 percent in just one month creating fear that the turbocharged Chinese stock market–which had risen 68 percent in one year and almost 150 percent in two–might be crashing.
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