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Is China Trying To (Slowly) Burst Another Stock Market Bubble?
Is China Trying To (Slowly) Burst Another Stock Market Bubble?
Despite a stellar performance of the economy the outlook for the Shanghai Composite Index isn’t promising as the government is taking advantage of better growth to spur deleveraging.
For a market relying more on liquidity than fundamentals, China’s worsening monetary conditions index suggests tough times ahead…
The last 4 days have highlighted the unusual effect in Chinese stocks.. each time the Shanghai Composite dropped over 1% (red dotted line) it was miraculously lifted to ensure it closed with a loss less than 1%…
As Bloomberg reports, authorities favor a steady stock market because it helps companies fund investment and repay debt by issuing new shares, which could help boost economic growth, according to Yin Ming, a vice president at Baptized Capital in Shanghai.
“The national team is behind it,” Yin said. “State funds will likely continue to be a market stabilizer.”
So one wonders, is China desperate to delever the speculative fervor in their markets… but do it just 1% at a time? Can the ‘market’ really be that well centrally planned? We will see…
If the 6-month lag in Chines commodities is anything to go by, the breakdown in Chinese stocks is nowhere near over…
Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?
Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?
The second largest stock market in the entire world is collapsing right in front of our eyes. Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out. Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States. From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value. It was the greatest stock market surge in Chinese history. But after hitting a peak, it began to fall dramatically. From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed. In the end, more than two-thirds of all wealth in the market was completely wiped out. You can see all of this on a chart that you can find right here. What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again. Is this yet another sign that a U.S. stock market crash is imminent?
Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008. Today, I want to share with you an excerpt from a New York Times article that was published in April 2008. At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…
…click on the above link to read the rest of the article…
China Warns Against Irrational Exuberance
China Warns Against Irrational Exuberance
Yesterday, we pointed out that in US dollar terms, Chinese stocks are a real standout among the world’s equity markets, having nearly doubled in less than a year. The catalyst? Liquidity, driven by a number of factors including, as UBS notes, expectations of further policy easing, QE-lite, bank bridge loans, and of course, excessive leverage. We also warned that this, like all liquidity-driven surges, will not end well:
The keyword in all of the above is “liquidity” which means none of the surge is driven by real, fundamental drivers. Which also means feel free to get on the ride, but remember to sell before the inevitable outcome of every single liquidity-driven rally: the crash.
Today we learn that in fact, China’s securities regulator wholeheartedly agrees with our assessment and like us, has been warning that the greater fool theory might not be the best investment strategy to follow for quite some time. Here’s more from Bloomberg:
The Shanghai Composite Index rose for an eighth day on Friday, climbing 1 percent to 3,617.32, the highest close since May 2008 and the longest stretch of gains since Oct. 14. The gauge rallied 7.3 percent this week, as transaction volumes soared, margin trading surged to all-time highs and new account openings rebounded to the highest level since December.
…click on the above link to read the rest of the article…
