ANOTHER CHINA STOCK BUBBLE?
Interesting reading here from BNP on the potential of another Chinese stock market crash. Their approach is interesting as they come to their conclusions using components of the same theories that make up my own work. I, however, do not believe the Chinese market is in for a crash, but rather believe the “long decay” scenario is far more likely. It would be highly unusual for two bubbles to form in the same market in such a short period of time – especially when the fundamentals and psychology of the market’s participants don’t justify it. In fact, it could be called an anomaly since it has never happened before. Not to mention the fact that we are nowhere near the stampeding euphoric sentiment that always accompanies a bubble:
Amid the current financial crisis, there has been one equity index beating all others: the Shanghai Composite. Our analysis of this main Chinese equity index shows clear signatures of a bubble build up and we go on to predict its most likely crash date: July 17-27, 2009 (20%/80% quantile confidence interval).
It must be noted that the model gives no indication on what happens after the critical point. It tells us the rise will end, but that might be with a crash or a slow decay.
By the very nature of the model, this result gives us two conclusions. Firstly, there exists a bubble in the Shanghai Composite Index. Secondly, it will reach a critical level around July 17-27, 2009. This will lead to a change in regime which may be a crash or a more gently bubble deflation. An extended version of this note, with a careful assessment of the confidence intervals and comparisons with the previous Chinese bubble ending in Oct. 2007, will be released soon.
Ain’t happening bro. These guys never heard the saying “dont’ fight the tape” huh?
well, the bullish sentiment sure came back fast. nice call on the earnings sentiment TPC. I should have gone gone more positive when you did, but I am sticking with my shorts for now and not liking it. A china crash would tank this market.
The Chinese have very deep pockets and are absolutely willing to keep the stock market proppped. Their market ain’t crashing anytime soon.
The Chinese reserves machine is still pumping, and that means plenty of dry powder for all types of stimulus, investment, lending, etc. We should all be happy that the Chinese are actually being this active, because without this behavior the world would be in the painful process of dramatically rightsizing excess capacity through unemployment, factory shutdowns, falling prices, etc
@ Fingercuffs – You actually believe it’s a good thing that CHina is creating all of this false demand for goods? They are driving up inflation in everything that hurts consumers. It’s damn near manipulation. How is that a positive? You keynesians always believe governments can fix everything by manipulating prices, but it always ends badly. When will you learn?
I’ve read some credible reports saying that the recent run up in Chinese stock markets was mainly due to a lot of borrowed money flowing into the markets. The lending by Chinese banks has nearly tripled from last year. Because the government has ordered the banks to lend more. And a lot of that loaned money was used to bid up stock prices in Chinese markets.
And the thing to keep in mind about using borrowed money to bid up stock prices is that this borrowed money will need to be repaid sooner or later. And it’s not only that but there is a limit to how much money investors can borrow. Which means that when they reach their credit limits, then the stock buying will end. And the stock market will reach ‘a permanently high plateau’, as one economist has famously said a couple of weeks before the 1929 stock market crash in USA.
Bidding up stock prices with borrowed money is a recipe for disaster. Because investors can’t afford to loose the money they’ve borrowed. And once the selling begins. Then there will be no stopping it. Not only will the stock prices crash. But the country will end up with a lot of bad loans too.
I think another stock market crash in China is the most likely scenario. Stock prices built up on debt are very unstable.
There’s always people here to drink the kool-aid. As TPC always says, credit bubbles don’t just end magically and result in a new bull market. They are a process of deleveraging.
I would like to seethe results of this socalled technique on other emerging markets like India.
The regulator last week issued memo to banks asking them to check their loans. Probably the banks have warned those companies. It is just a matter of time those companies take profit with their borrowed monies. If everybody wants to get ahead of others, then we have a stampede. Probably they are waiting for some high liquidity events to cash out.
One of such event is just around the corner.
Nonetheless, it would not be a crash, as long as the expectation that the government would provide a bottom holds.
just be warned that BNP issues a lot of warrants on Shanghai A shares, and HK H shares. you have to read their report with a filter.
You guys are getting a few things confused. China’s government is not paying for anything with debt. Unlike the U.S., they have cold hard cash earned from making things. The debt issues lie with the Chinese banks, who have been lending like mad to companies across the region. A good proportion of infrastructure projects and Chinese companies are getting more levered, but the government still has a massive hoard of reserves. Thus they have plenty of cash to keep the market propped up IF they so choose. That is why I have to cast serious doubt on this prediction that the Chinese market will crash.
I am not a Keynesian. I do not think that what governments are doing around the world is ultimately a good thing. I would actually like to see us take our licks and come back stronger after a couple years of deleveraging and absorbing excess capacity. But the REALITY of the situation is that China has helped provide a floor in a deflationary spiral.
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