China - This time is different

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bchadwick

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I think of China in comparison to the US 1920s rather than the US 1990s, but the Japanese 1980s might be a sensible comparison too (I have to think more about that, mostly learn about what was going on in Japan then).

In China there are new technologies and new paradigms, at least from the Chinese point of view. The transition from Socialism is a new paradigm in political-economic relations, and the wealth (and inequalities) it has generated are something the system has not had to grapple with before. In the 1920s, the emergence of things like washing machines and refrigeration, radio, cars, telephones, and electricity in the United States were considered to be new growth industries with limitless potential. I think for a lot of Chinese, the fact that they are getting this stuff for the first time makes the comparison more vital.

The interesting thing is to figure out how far to take the 1920s analogy. We know how the 1920s ended, and what came after it. In the stock market, margin requirements had a big part to do with the depth of the crash. What are the margin rules in Chinas markets? (genuine question, I don't have the data in front of me)

After the crash, there was chronic underinvestment which led to job losses, which led to underconsumption which led to further depression, and then social unrest. There was close to a revolution in the United States and President Roosevelt actually entertained the idea at one point of suspending the constitution and replacing it with one modeled on more corporatist lines (with representation of functional parts of society - labor unions, industrialists, the state, etc. - rather than geographic elections. That didn't happen, but it was clearly in response to the massive numbers of discontents. The "communists" persecuted by McCarthy in the 1950s were (to the extent that they were communists at all) largely people who felt that capitalism was broken in the 1930s and had joined socialist/communist movements.

So, will we see a 1929-style crash in China? Probably not as deep, because I think the regulatory authorities are less likely to let the margin call chain reaction occur, and because a lot of the investment could come from abroad (reducing the underconsumption effect), but it would still be highly disruptive.
 
The 1920's analogy worksd for me too, but I was afraid to use it for the wisecracks I might get.
 
Wisecracks? Always useful to know who the dummies are, so you can bet against them! ;-)

Obviously, if you can time the crash appropriately, you can make a mint. But just because we know the system is unstable doesn't mean we can tell how to time it. I guess you want to make bets on short term gains (say to 2008) and long term increases in volatility.

I'm sure there is a derivatives strategy that is suited to that future scenario, but I don't have enough intuitive feel for derivatives to figure it out.
 
I don't know about that, at least not directly. I don't think that foreign investors can easily invest in derivatives betting on a collapse of the Chinese stock market or short Chinese stock (not that I have the stomach for that anyway). I'm sure you could work out something with some bank but it would not be nearly as easy as betting on the collapse of the FTSE or something.
 
I think shorting Chinese stocks could be difficult, but I would have thought options and futures a Chinese index or ETF would be possible. I don't know for sure, though.
 
I'm wrong - traded in Singapore:

http://www.sgx.com/psv/derivatives/futures_options/equity_index/documents/FTSEXinhuabrochure-English_000.pdf

Not for me....

Edit - BTW They are quanto contracts which means they are denominated in USD while the underlier is in yuan. The interesting thing about that is that you can use prices on the futures contract to back out an implied correlation between the exchange rate and the Chinese stock market.



Edited 1 time(s). Last edit at Saturday, June 30, 2007 at 11:49AM by JoeyDVivre.
 
If you look at on the micro level, people with absolutely no knowledge of investments are dumping cash into large local sharemarkets such as Shanghai A index or Guangzhou indicies.

Each day, millions of new people are opening an account with a broker, even farmers, labourers and consequently, there is a very low level of savings amongst the population (savings are needed for economic growth, even though China's central bank has the largest FX reserve in the world).

To curb this widespread investment without being inadequately informed, you may have read that the central bank has been trying to enforce regulations on brokers such as to provide information courses on stocks. Recently, a 100% increase in stamp duty and also raising the interest rate for borrowing/lending have been imposed to deter investors.

As I have once heard, this unjustified placement of capital into shares is not investing per se, but gambling. Based on this, I would have said China's economy is a bubble, however with the support of the strong economy, I don't believe it will endure any major corrections in the short term (say 1-2 years .. lets see the impact of Beijing Olympics), and will recover from corrections brought on by shocks (from other markets) quite quickly.
 
"Recently, a 100% increase in stamp duty..."

From memory, I believe it was actually a 200% increase, from 0.1% to 0.3%.


I think Bchadwick had it right when he said that "if you can time the crash appropriately, you can make a mint. But just because we know the system is unstable doesn't mean we can tell how to time it."

Besides, whats the PE on the Chinese SE? 45x or something? that's expensive, but hardly on another planet given current growth rates and the strategic positions on offer.

IMHO the stock market will has a lot further to go if it is going to be a run-away bubble... it could easily double again, at which time that short would look pretty painfull.
 
, there is a very low level of savings
> amongst the population (savings are needed for
> economic growth, even though China's central bank
> has the largest FX reserve in the world).
>


what are you talking about, China has one of the highest levels of savings in the world?? A 25% level has been kicked around. The People's Republic has something in the order of a trillion $ in reserves.

The fact that middle class Chinesse people are pouring their lifetimes savings (which are far higher than U.S., Canadian, European etc. savings as a percentage of lifetime earnings) and could lose a tonne of it in the market would definetly destabalise the Communist regime...



Edited 1 time(s). Last edit at Monday, July 2, 2007 at 08:48AM by CFA_Halifax.
 
Anyone seen this yet:

http://www.economist.com/displaystory.cfm?story_id=9401752

"If China's share-price bubble burst, the economic consequences in China�and among its neighbours�would probably be mild, since Chinese share-ownership is relatively low. Nervous investors might pull money out of other Asian stockmarkets, but large foreign reserves should prevent serious capital flight."
 
No, haven't read that, but I am sure share ownership is very low. My worry is that, as the bubble resumes, and the 300K or whatever number of people is that are opening new trading accounts daily start pouring serious proportions of their liefteime savings into these accounts (as mentioned above, they save ALOT), they could lose a great deal of their net worth, or all of it if they start trading margins (someone asked whether or not margin trading is allowed, a great question indeed).

They have lots and lots of money, and the ride could really keep going as they pour more of it into the markets, let's just hope cooler heads prevail. China is still a great long term investment, and as long as people aren't leverging, I'm sure they will pull tidy profits with a 10 yr+ investment horizon.

There is something scary about hundred of millions of people losing their net worth in a bubble market though.

Let's not even get into China huge demographic problem of an extremely rapidy ageing society (thanks to the one child rule) and a male/female ration of like 1.1 to 1, and even 1.2-1.4 (same as above) in some regions I've read. The government is appartently very concerend by what that could mean politically.

I think India is better long term...



Edited 2 time(s). Last edit at Tuesday, July 3, 2007 at 10:41AM by CFA_Halifax.
 
I bought PUTS on FXI after it gapped up ~5 days in a row (mock trading contest). These things are KILLING me.
 
Like I say, the fact that the gov't wants to avoid a crash and the social, economic and political damage it would cause to 08 Olympics, and the fact that there is so much more savings that could be flipped into the markets makes me think this may not fall apart until next year or so.
 
CFA_Halifax Wrote:
-------------------------------------------------------
> Like I say, the fact that the gov't wants to avoid
> a crash and the social, economic and political
> damage it would cause to 08 Olympics, and the fact
> that there is so much more savings that could be
> flipped into the markets makes me think this may
> not fall apart until next year or so.


yeah, well the communist party's survival is pretty much dependant on continued growth and stability so its a smart bet that they would be alot more willing to implement drastic measures inorder to sustain the status quo.
 
Any chartists around here? What do they make of the current chart for the SSE Composite? It looks rather weak to me.... Lower highs, a double top and a downward trend.
 
I'm going to start buying this baby when she crashed because it's a great long term investment. Next summer after Olympics the hangover will set in!
 
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