January 31, 2007
What It Will Look Like When the Chinese Stock Bubble Bursts
I’ve lined up the price of the Shanghai Composite to correspond with the peak of the Internet bubble (as represented by the IIX). When bubbles burst it ain’t pretty, and people who are paying the wrong price for Chinese stocks are going to learn an expensive lesson.
Cat: | Time: 7:24 am (utc+8)
January 31st, 2007 at 7:42 am
Maybe more scary:
1. My SF realtor said lots of people are out looking to buy SF real estate and it has not even dipped from an incredible high.
2. Warnings at Davos by economists about the high level of risk in the financial markets and the total disregard/dismissal of these warnings by people at Davos per Bloomberg.
January 31st, 2007 at 7:52 am
BBC: You mean those wimps, ninnies, and pointless skeptics at Davos?
January 31st, 2007 at 8:25 am
Right, those wimps. When the name-calling begins and the spreadsheets are hidden behind the back…a question mark forms in my small wimpy mind. No, FT has recently had articles about the layers of leverage compounding the risk equations that no one really knows.
Maybe it’s time to buy an SF home and dam the debt.
January 31st, 2007 at 8:33 am
BBC: I think it’s best to avoid being blindly pessimistic or optimistic, and to strive at all times to be realistic (with an optimistic bias).
January 31st, 2007 at 8:38 am
Great post, Maoxian.
January 31st, 2007 at 9:27 am
You can short IVAN pretty soon. Looks like it is getting swept up in the fire.
January 31st, 2007 at 9:55 am
[…] P.S. - MaoXian has a spooky looking chart for all you China bulls out there. […]
January 31st, 2007 at 9:59 am
Hudson: IVAN is an energy play, not a China play, right? Plus it’s under $5 so good luck trying to short it.
January 31st, 2007 at 10:00 am
It looks like the Shanghai Composite has gone from 1,000 to 3,000 -where the IIX went from 100 to 700. I think you’re well right about the fact that China has a whole of lot of fundamental, on-the-ground work to do before it even begins to seems optimistic. The growth is a great story, but underneath the size of China it is still an emerging market. Serious questions about the burgeoning middle class (the stability of society), broader economic ethics (the role of government in the markets, the sustainability of such a leveraged-to-expansion model, etc.), and so forth have to be answered first. Not to mention the junk stocks that are hitting highs solely because there is uninformed or risk-ignorant money looking for a grave.
Nonetheless, I’d hate to have started shorting the IIX around 300.
January 31st, 2007 at 10:09 am
rock: I agree, and top picking is for fools and limelighters (I’m both). ;-)
January 31st, 2007 at 2:05 pm
agg: I don’t think this site is banned (yet) but if you want to steal the chart (with full attribution, a link, and a promise to take me to lunch), then it’s OK. ;-)
爱面子 or not, it’s tough to blow air into a balloon that’s already stretched to its breaking point. We’ll wait and see and if I’m right I will gloat about it and if you’re right we’ll both conveniently forget my position. ;-)
I got 10,000 RMB from the bank yesterday and all the bills were crispy fresh and consecutively numbered: they’re still printing money like crazy.
January 31st, 2007 at 8:42 pm
CM,
i remember that you mentioned, that theres no instrument to short this market…is that right ?
January 31st, 2007 at 9:18 pm
I couldn’t find an ETF to short , but here are the top ten stocks on the index, some of which have ADR’s on the NYSE.
01.Industrial & Commercial Bank of China (Market Cap:1397.86B)
02.China Life Insurance (Market Cap:904.78B)
03.Bank of China (Market Cap:887.31B)
04.China Petroleum & Chemical (Market Cap:692.22B)
05.China Merchant Bank (Market Cap:201.09B)
06.Shanghai International Port (Market Cap:164.56B)
07.Baoshan Iron & Steel (Market Cap:161.81B)
08.Daqin Railway (Market Cap:114.71B)
09.CITIC Securities (Market Cap:107.99B)
10.Shanghai Pudong Development Bank (Market Cap:104.30B)
January 31st, 2007 at 10:09 pm
and when is this bubble expected to pop? ive got gtc trade for fxi locked in at 110. how are my chances?
January 31st, 2007 at 10:18 pm
Peter: I’ve just learned about a closed-end fund based on the A-share market which may work, ticker symbol CAF.
uptik: Yes, thanks, but again these are kind of “blue chip” companies and I prefer to look at the dregs.
joe: Now that I’ve predicted a top I expect the market will continue up at least a thousand more points. ;-) You’ve got a GTC order in to short 110? Where’s your stop loss?
January 31st, 2007 at 10:55 pm
I’ve just put trailing stops on my investments to limit any down side. Not selling yet, just not buying more at the moment.
February 1st, 2007 at 12:33 am
Extremely puzzled. Lots of FUD here. Exactly what is the linkage to the Internet bubble with China? Why not link it to the run up and melt down of 1929? It seems just as valid. “If it is this high in growth valuation now it must be ready to fall because it MUST be over-valued because it is so high”… geezz what an analysis - you should be in Las Vegas to predict the roulette wheel with that winning skill or finding water with a stick in the desert.
The yuan remains relatively fixed (artificially - well yes but it is still fixed), while U.S. inflation is pegged by some sources at almost 10% yearly. China has stockpiles of U.S. foreign currency that - up until few months ago were focused exclusively on re-investment in U.S. Treasuries. This direction was changed (reported changed by the government with one of those 5 year plan meetings - it may have changed earlier and just been announced then) to be allowed for other investment directions - internal and external - Africa for example to lock in energy resources. China’s government ministers have been headed to Africa for sometime - Premier is there now. Notice the sale of Boeings to African airlines a few weeks ago? - where did they get the greenbacks for that purchase? And the routes they are opening. duh. Not to mention China is a net producer/buyer of gold, indicating a fundmental support of the “printing money like crazy” activity. We do that in the U.S with next to nothing to back it - this is apparently better somehow and have been for years. These items indicate a fundmental investment direction of more growth - not less - that is not dependent on the U.S. as the sole market for China. And India - major exports from China to India announced last week - over taking projections for the past year (two years ahead of the schedule) - dare I say it… by a HUGE amount - oops I guess I just allowed the pundits to predict the trade must then fall between the two countries since it grew so fast beyond “normal” patterns. As for the growing private sector - as the government is putting up power plants at a tremendous rate the cost of industrialization will be lowered for existing and future businesses. (will not go to the pollution / slave labor thing as it can not be fixed from the outside - it is just the conditions that are functional now).
If a man has only $40 bucks of income and grows that year over year at 40% at the end of 10 years the “outragous” growth number is still minimal to the potential seen in the developed world. Note the average wage in Guangzhou has just been pegged at US$10k per year. In a city of 15 million people. Compare that to the average in NY,NY and see how far they have to climb just to reach parity with the current world wage leader. And don’t you think they are headed that way?
IMHO - this growth thing has just started and while FUD from irrelevant analysis can startle the day traders - it has no meaning long term. Put your money on China growth - or better yet sell that FXI or whatever now with your fickle currency and stay out so I can buy more at a cheaper rate. The gains from U.S. inflation alone will make me happy - the “growth” is just gravy.
Enjoy !
February 1st, 2007 at 1:51 am
maoxian: not a short, just an order to sell what i own. im pretty confident it’ll head past 110. what price on fxi does a gain in 1000 more points equal to?
February 1st, 2007 at 6:18 am
in the short term, there’ll be a modest to mild correction, but in the long run, the china play is still a solid growth story, trust me!!
February 1st, 2007 at 7:44 am
Ivan is an energy play in China. They are exploring oil with the cooperation of the Chinese govt. I don,t short stocks but it seems to me if it is possible to short a stock at at $4 and cover at $2 then your doing ok. Do brokers not lend shares under $5 or do you not wish to get involved in that range?
February 1st, 2007 at 10:13 am
Jim F.: I’m bullish on China too (I live and work here after all), but I’m careful about the prices I pay and when my manicurist is giving me stock tips I find it deeply troubling.
joe: So you want to sell as it goes back up, assuming it does? I was joking about the thousand point gain in the Shanghai Composite.
ray: Your guess is as good as mine.
Hudson: How much of their business depends on China? A lot of brokers have rules about not shorting sub-$5 stocks, and yes, it’s probably difficult to find shares anyway.
February 1st, 2007 at 11:46 am
I’m with rockaintdeadyet and Jim F. - First, simply laying two graphs on top of each other and saying “look at what’s going to happen” is meaningless. The scales are different, the indexes are completely different - I could just as easily find some index or stock that had a shape like SSE but kept going up! Second, the fundementals in China at the moment have nothing to do with US tech stocks in 1999. What exactly were you trying to communicate?
If you’re saying China stocks have some froth and “irrational exuberance” in them right now I would agree. And to be careful? Absolutely with you. But if you’re convinced that the market will steadily decline 85% over the next 3 years, then give more support than a mis-aligned graph.
My opinion? China’s a good play over the long term - buy carefully and for the long term. It’s good we’ve had this pull back but I’m betting that it will eventually climb back up.
February 1st, 2007 at 2:13 pm
Martini: I agree that it’s a silly, provocative exercise mainly designed to double my blog traffic, which succeeded incidentally (up to 24 readers from 12) … Anyway, if you are a “careful buyer” this would be the last time you’d be putting money into the Chinese market. I fondly recall folks saying how “good” that “pullback” in the Net stocks was back in April 2000, remember?
February 1st, 2007 at 9:33 pm
About China:
From FT.com:
The rally over the past year came after a five-year slump in mainland share prices, when China was one of the world’s worst-performing markets.
The market is vulnerable to speculative bubbles because China has a huge volume of bank deposits with low interest rates and because controls on capital outflows make it relatively hard to take funds out of the country. As a result, when optimism about equities is high, the stock market sees heavy liquidity from retail investors.
Also, I read somewhere there are only 84M investors so far in China. More to come…
With that: feel recovery will be quicker due to more people and more $$ available.
Your opinion please.
GM
February 1st, 2007 at 9:44 pm
gm: There were a huge volume of bank deposits, low interest rates, and capital controls during the entire multi-year slide in the Chinese stock market. It just seems to me that a whole lot of people are trying to put a positive spin on the speculative excesses of the moment.
February 2nd, 2007 at 7:08 am
CM: You’re right in your comments. When your average everyday person starts giving tips about an asset and how they and their friends are making lots of money trading or investing in that asset is the canary in the mine and anybody with interests in those assets should run not walk to the exits.
I live in SW Florida and the RE market was ripe for a major cooling off after many people around me who are not in the business were ranting about how much money they were making and were going to make in the RE market.
FOOLS AND THEIR MONEY ARE SOON PARTED….still lives on :-)
February 3rd, 2007 at 3:50 am
maoxian, if it is not inappropriate, please tell us where you live and roughly what you do. how long have you lived there? how do the chinese feel about the usa or do they (often like us) separate the people from the government…….etc. the more etc. the better.
February 3rd, 2007 at 7:58 am
My data is limited, and obtained from Yahoo!Finance.
1. IIX peaked at 688.5 on 3/27/2000. The oldest data I can get from Yahoo is from 10/4/1995. On that day, IIX stood at 67.05. That’s a whopping 927% gain over 4.5 years, or 1,636 days!
2. Shanghai Composite’s recent high registered at 2,975.13 on 1/24. If we looked back 1,636 days from that day, 8/2/2002, the index stood at 1,661.87; a gain of 79%.
927% vs. 79%. Are Chinese stocks about to bubble, or is the recent correction simply just that … a correction? Only time will tell.
February 3rd, 2007 at 9:04 am
bob: I live in Beijing and do as little as possible. We moved here in May 2005. It’s tough to generalize about what the Chinese people think about the USA, but there’s a definite love-hate thing at work. Maybe I’ll try to write a post about it at some point.
February 5th, 2007 at 10:00 am
How to say 存款保证金 and 爱面子 in English?
Lunch of course, whenever I go to Shanghai:)
The main reason I have to steal the chart is because most readers will not see the picture if I just add the link.
I mentioned your site in my Blog twice, but I doubt if 10% people might click the link. Chinese people don’t know how to think independently. They just want to listen to the opinion from a famous people then concentrate to one single sentence and remember it:(.
So they wouldn’t click the link which forward to the sources to double check if the opinion is correct which base on the evident.I always be complained by my readers that there are too many links in my article:(.
As the same reason mentioned, the Chinese stock market will go crazy beyond your imagination in several years:).
———
February 5th, 2007 at 10:15 am
存款保证金 are “margin deposits” and 爱面子 would be something like “caring about face,” (face is a very Eastern concept).
This is an interesting idea about the stock market implications of the Chinese practice of blindly following authority and generally not thinking independently … I hadn’t thought about that (not much of an independent thinker myself, lol).
February 19th, 2007 at 12:02 pm
Are there any investment vehicles for shorting stocks on the chinese exchange.
Are you aware of any mutual funds that concentrate on chinese stocks……long or short positions.
February 27th, 2007 at 8:12 pm
[…] I thought that the following linked article in the next paragraph would make an interesting morning read. I couldn’t help but be reminded of another China article I read last month in Maoxian: What It Will Look Like When the Chinese Stock Bubble Bursts. It’s a simple model of a “What If” scenario. I think Maoxian was trying to convey a basic message: patterns repeat. I think some of the commentators over- analyzed the basic message but that’s just my opinion and I live by keeping it simple. His article is best summed up in the following quote “I’m bullish on China too (I live and work here after all), but I’m careful about the prices I pay and when my manicurist is giving me stock tips I find it deeply troubling.” Simple enough. […]
March 30th, 2008 at 2:36 am
I am a Unis student, our teacher uses your words for Translation homeword. I find the passage here, I hate you guys, especially those guys saying a lot of words! 烦躁！
March 30th, 2008 at 10:50 am
The similarity is really amazing. Would you please update the comparison results? Thanks. I assume The A-share market is in a A-wave correction now and will eventually reach 2250 (high on June 2001) within 2 years.
March 30th, 2008 at 3:54 pm
speed: Thanks for the idea … I’ll post an updated chart. Of course the Shanghai Composite continued up another 3000 points after I called the top here, lol.
April 1st, 2008 at 8:33 pm
hello ,MaoXian,nice to meet you!My teacher is your fans,he give your passage and the leave word to us to translate into Chinese.If you are Chinese or have Chinese friend,can you send me your translation to me ,please?Thank you very much!
April 1st, 2008 at 9:04 pm
Kevin: Who’s your teacher?
April 1st, 2008 at 9:11 pm
he’s name is Harrylee
April 1st, 2008 at 9:27 pm
Kevin: And where is Harry Lee located?
April 1st, 2008 at 9:29 pm
actually,I just want to know what’s the meaning of”layers of leverage compounding the risk equations”
April 1st, 2008 at 9:36 pm
Kevin: Ha! I have no idea how to translate that and neither does Harry.
April 1st, 2008 at 9:36 pm
China,he is our English lesson’s teacher.He teaches us translation
April 1st, 2008 at 9:40 pm
Thank you all the same.
April 12th, 2008 at 10:36 am
Who can tell me GTC is short for?????
April 12th, 2008 at 11:15 am
As a chinese native speaker and having english as my second language, I have to say there are tons of sentences I understand but can’t translate it from english to chinese or vice versa. hehe
sorry, way off the topic….
Chairman, how strong do you think the china adr in the US will be tied with the china stock market? I mean, if the china market failed, will these adr also fall even if they are not traded there?
April 12th, 2008 at 11:32 am
@kandey: Good Till Cancelled.
@Landola: Many native English speakers also don’t understand tons of my sentences. :-)
I guess the Chinese companies listed in the US should act differently from the ones listed in China … the US market is a little more “efficient,” I suppose.