Chinese Stock Market Showing “Characteristics of a Powerful Mania”

Investors in the Chinese stock market have clearly taken leave of their senses. So have concert goers. We read this morning that pop-diva Christina Aguilera has added the city to her concert tour. Yan Wang, Chief investment strategist at BCA Research, puts it this way, “The parabolic price moves, expensive valuation and mass speculation in the Chinese stock market have taken on all the characteristics of a powerful mania and a building speculative bubble.”

What he said.

Since falling 9% in one day in February, stocks in Shanghai have risen by 40%. In the 50 trading days since the February correction, stocks have risen all but nine of those days. And on the calendar year, the index is up 45%, better, even, than Australia’s roaring bourse.

Maybe this is why James Packer is so eager to get a casino going in Macau. We’ve been told that Macau is the only place in China where gambling is legal. But obviously, the people saying that don’t have a clue. What’s going on in Shanghai is higher stakes gambling than anything you’ll find at a black jack table or a pokie.

But just what’s at stake? The tech bubble wiped off nearly $7 trillion in market cap from the American stock market. This was mostly fictional wealth, paper gains that Baby Boomers were sitting on headed into their retirement years. Crucially, the housing boom come along after the tech bust, courtesy of Alan Greenspan’s low interest rates. And the tech boom happened early enough in the financial life o America’s boomers that they still have time to recoup the paper gains they lost in the tech bust.

Here’s the difference, though, between the last American bust and the next Chinese one (or perhaps even global.) In America’s bust, most investors did not lose a lifetime’s worth of capital. True, they lost a bull market’s worth of gains. And that was painful, humiliating, and a large financial setback. But many boomers still had nest eggs from which to rebuild, not to mention equity in their homes, which led, of course, to the huge property boom. It’s there, by the way, that the real financial damage could come to the Boomers.

Back to the Middle Kingdom, though. Can new Chinese investors afford to lose everything they have in the stock market? Can anyone ever afford to lose everything in the stock market? Of course not. It helps if you have other assets to fall back on after the bust. You are less likely to riot in the streets.

And if you think we’re exaggerating about the potential for instability from a stock market crash in Shanghai, it doesn’t take much. Commuters in Buenos Aries torched some ticket booths in the country’s main train depot simply because the trains weren’t running on time. When a mob gets momentum, it’s more dangerous than a cloud of locusts in a cornfield.

China’s enlightened leaders would love to keep things humming along until after the country shows itself off to the world at the 2008 Olympics. They may yet pull it off.  But once the animal spirits are unleashed, they are nearly impossible to control. Like a bad storm, you simply have to ride it out and reckon up the damage when the skies clear. Stay tuned. We see rain in the financial forecast.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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