Friday, July 31, 2015

China Stocks in One Chart

A thumbnail chart of the Shanghai Composite index is enough to tell the story: stocks doubled between November and May, then in a few weeks fell halfway back.

Some analysts are comparing the chart to the Nasdaq composite in the 2000 dot-com bubble. Others see echoes of 1929. No one has proposed a historical point of reference that would have the market bouncing right back.

Thursday, July 30, 2015

Fantasy Logic in China’s Stock Market Intervention

The central government has gone so far to prop up the flailing stock market in China that it effectively isn’t a stock market anymore. The restrictions on selling are such that holders of most shares of listed stocks are prohibited from selling, and not just briefly, but indefinitely (officially, for the next year, but the restrictions could be extended at the stroke of a pen). After a few vague threats this week, there is speculation now that prosecutors will start arresting executives of companies whose stocks have declined. Obviously, this won’t stop the decline in stocks, but it will make it more difficult for the stock market to continue into the future.

Government blundering in the stock market intervention underscores the thought that China’s problems are not merely a stock market problem, but are grounded in a fantasy view of economics at the highest levels of government. China’s special advantage has long been that it can intervene quickly and decisively to overrule the conclusions of the free market when the market is in error. In the stock market, though, government leaders seem to feel they can overrule correct economic decisions of the market without paying a price. In effect, China wants to buy all the overvalued shares without paying anything out of its own treasury. The overvaluation in total is an estimated 3 years of national GDP, a sum no government could possibly pay, so it is sensible that this approach is not being considered. One way or another, then, stock values have to decline. The notion of supporting them at current levels is unrealistic, and policy should be pointed toward a soft landing rather than a sustained bubble.

All this could be smoothed over eventually if the economy just kept growing, but there are hints of a recession in China this year: surprisingly soft import and export numbers, the largest housing vacancy rate in history, the ballooning of shadow banking balance sheets. The response to the stock market crash has cost the central government some credibility. If policymakers apply the same kind of fantasy logic to problems in more fundamental sectors of the economy, whether real estate development, manufacturing, or shadow banking, the results could be chaos.

Wednesday, July 29, 2015

Why China Is Bubble-Happy

China has a major bubble problem” says a new story by Sophia Yan at CNNMoney. There aren’t many places for retail investors in China to put their money, and until that problem is solved, there will always be a bubble somewhere in China. Investors are now getting out of the stock market, which is in a scary-looking decline since its peak in June and is subject to new trading restrictions as the central government tries to stop the decline by any means necessary. With stocks in China obviously overvalued, does that mean a new real estate bubble is inevitable?