Another classic "pump and dump" strategy. The big money has already left the building, leaving the gullible middle class holding the bag, once again. I wonder how many billions Mr. Soros made this time?
1
It's not wise to inject American politics into this issue.
1
Thanks for this analysis, which is a useful corrective to misleading reporting on recent days. However, the points about "late 2014" might be sharpened even further. As the chart provided shows, while stocks, using the Hang Seng index as an indicator, began to rise in July 2014, they really took of in November-December and skyrocketed between then and early June. Why the stampede? How much was due to margin trading and, if a lot, did rules or the availability of margin capital change? Is this just a frightening flash of "human spirits" or could it have been manipulated?
1
The World economy depending on China's performance is like blind leading the blind!
3
As Mr. Irwin brilliantly explains the Chinese Stock Market is in a slump, caused by a conceived economic invincibility by the Chinese that their market is a win win for the investor.Like the economic disaster we had under Bush, people rushed to invest their money in the stock market to reap the profits, others were receiving only to find the market didn't have the legs they thought it did & now theres a rush to retrieve their money.Strange that this economic downfall should be so similar to our own.But what is to me more strange that a Capitalist economic collapse is occurring in a Communist country, without the freedoms Americans enjoy , like a free press, & free Speech. What makes this whole scenario even stranger is this Communist country is the 2nd largest economy on earth & growing.According to my conservative brothers, this was not supposed to happen in a welfare state, which is why their call for small government is to avoid Socialism. I guess liars figure but figures just don't lie.Thanks to the support of Democratic liberalism our gay citizens are now entitled to equal rights, & our black citizens are l equal in the eye of the law. these advances could not have happened without strong Government involvement.
I'm more than ever proud to be an Ultraliberal.Go Hillary.
I'm more than ever proud to be an Ultraliberal.Go Hillary.
6
Pass the tulip bulbs. A story that takes different forms but one that will be told again and again long after our great great grandchildren are gone.
4
Buying on the margins. Investing with borrowed money. Did anybody at Shenzhen or Shanghai ever even study 1929?
5
This is not a harbinger of good things for our own economy. These two economies are linked in economic trade across the consumer categories. Chinese investors had been major players in our real estate market as well. Those who moved money out of China were probably smart. If we follow the 2008 stock correction there. It happened here too.
2
I disagree on the real estate front. I can't wait for foreign money to flee US real estate - bay area anyone? Leave land to the locals who need it, not the specuvestors and global elite.
This whole episode just how incompetent President Xi is. As a confirmed Maoist, there's no sign that he has any clue about markets. All of the steps the Chinese government has taken to stem the crash are making it worse. Does it add confidence to traders to have thousands of stocks frozen?
1
How many times will the Chinese Communist rip off the Chinese people? The current speculative stock bubble is driven by Communist margin lending and the touting of shares in communist companies is just the latest in a series of rip offs, going back to WW2. In WW2 the Communists collaborated with the IJA and sold opium in order to fund themselves. next, the CCP sold "the great Leap Forward", that caused the starvation deaths of 30 million farmer peasants, who's food was stolen for the Party. then it was "the cultural Revolution", when party hooligans took whatever they wanted. Next, it was Chinese capitalism, exploitation of Chinese labor, theft of land, pollution of the environment in order to enrich the Communists. Next, cam the apartment speculative bubble, profits going to the Party. Finally, the stock bubble, so the Party could sell shares tot he public in their faltering business. How long will the Chinese allow themselves to be ripped off by the communists, before they immigrate en mass to the USA?
The investing public in China is learning about market risk. It may take a few meltdowns before the education is complete, especially if the Chinese government continues to interrupt the lessons by intervening in markets. Of course the government has to learn its lessons as well.
2
If they learn anything,it will be forgotten,in the future.Booms and busts will continue,like always.
1
"The chart shows how easy it is to frame market data in a way that sounds either scary or benign, depending on your inclination"
If only the nytimes would say that under every economic chart it publishes in its economy, business, and money sections. Cough.
I am surprised the article writer got away with saying it so baldly.
8
It is very probable that most of the stock investors are from major cities where Housing boom still barely stays in spite of the beginning collapse of housing boom in various regions. In the US, burst of dot-com bubble didn't quench the fever of coming housing boom in the mid 2000's. In China, bubble burst of the stock market may trigger the bubble burst of housing boom in major cities because housing bubble has been nearly peaking in China. I think Chinese government has made a huge mistake in fanning stock market even though they know the risk. Sometimes overconfidence leads to the simple but dangerous mistake.
6
The discussion that is occurring in these comments could not happen in China, not because of government media control, but because the general population's conception of a a 'stock market' is not rooted in their cultural experience. The West's almost religious belief in markets and their validity is not shared by even the new wealthy in China. The Chinese have always been savers and gamblers, both qualities will fuel participation in their nation's stock markets, but their acceptance of losses and and their support of a laissez-faire stance by the government is uncharted territory for the Chinese consumer.
7
OK, I am a bit late to the conversation, but I do want to hold Upshot to a higher standard when it comes to the display of data, something that somehow should be part of the charter?
When dealing with quantities that have no upper bound (and that tend to go to extreme values), it is pretty conventional to use a logarithm scale. The wild fluctuations seen in the graphs here are certainly dramatic, but do not lend themselves to interpretation nearly as well as they would expressed logarithmically.
Seems to me that virtually all displays of, for example, historical stock market valuations, have been shown on log scales.
When dealing with quantities that have no upper bound (and that tend to go to extreme values), it is pretty conventional to use a logarithm scale. The wild fluctuations seen in the graphs here are certainly dramatic, but do not lend themselves to interpretation nearly as well as they would expressed logarithmically.
Seems to me that virtually all displays of, for example, historical stock market valuations, have been shown on log scales.
Government seem to take action when crisis occurs.
Chinese officials looked the other way when the
market soared by 83% since 2014. They let the
bubble built and did nothing. Meanwhile Chinese
got gripped by greed and discovered a way to make
quick buck on speculation. Margin investing induced
every Weng, Deng and Chen to jump into investing.
Many investors are probably wiped out just like
American home buyers in 2006-2007 when the prices
hit the peak. Such is the nature of the market-boom
and bust. The cycle goes on. Some laugh their way
to the bank and others to the bridge to jump from.
Chinese officials looked the other way when the
market soared by 83% since 2014. They let the
bubble built and did nothing. Meanwhile Chinese
got gripped by greed and discovered a way to make
quick buck on speculation. Margin investing induced
every Weng, Deng and Chen to jump into investing.
Many investors are probably wiped out just like
American home buyers in 2006-2007 when the prices
hit the peak. Such is the nature of the market-boom
and bust. The cycle goes on. Some laugh their way
to the bank and others to the bridge to jump from.
5
I would like to offer a quote from the Roosevelt Institute's analysis of the financial crisis of 2008 that helps to put the Chinese stock market crisis in perspective:
"In the US where the crisis originated in mid-2007 after two decades of monetary excess that encouraged serial debt bubbles, the NYSE Euronext (US) market capitalization was $16.6 trillion in June 2007, more than concurrent US GDP of $13.8 trillion. The market cap fell by almost half to $7.9 trillion by March 2009. US households lost almost $8 trillion of wealth in the stock market on top of the $6 trillion loss in the market value of their homes. The total wealth loss of $14 trillion by US households in 2009 was equal to the entire 2008 US GDP."
Readers leaving comments here who seem to think that American investors are far more sophisticated and savvy than their Chinese counterparts should pay particularly close heed.
"In the US where the crisis originated in mid-2007 after two decades of monetary excess that encouraged serial debt bubbles, the NYSE Euronext (US) market capitalization was $16.6 trillion in June 2007, more than concurrent US GDP of $13.8 trillion. The market cap fell by almost half to $7.9 trillion by March 2009. US households lost almost $8 trillion of wealth in the stock market on top of the $6 trillion loss in the market value of their homes. The total wealth loss of $14 trillion by US households in 2009 was equal to the entire 2008 US GDP."
Readers leaving comments here who seem to think that American investors are far more sophisticated and savvy than their Chinese counterparts should pay particularly close heed.
21
Some countries force their elderly to support large corporations and others through government insurance rates that charge more for the same limited coverage because a person has a few more dollars saved up. The same countries hold interest rates to near zero to subsidize the banks and hedge funds and strip wealth from savers. In addition to the US, these countries include China.
10
A useful, but missing, chart would compare Hong Kong's Hang Seng stock index (HSI) to the Shanghai Composite (SHCOMP). They generally move in step, but diverged earlier this year when the Shanghai Composite went ballistic. The opposite occurred during the height of the Hong Kong protests. In both circumstances, prices eventually converged. I suppose some investors may make such a convergence trade. Also, momentum strategies (buying what's already gone up) are popular in Chinese stocks and these strategies are known to be associated with dramatic and abrupt price reversals.
5
The most important point made in the article:
"Many of the strongest Chinese companies list their shares in Hong Kong or New York, with those listing within China more likely to have questionable business models, accounting and corporate governance."
"Many of the strongest Chinese companies list their shares in Hong Kong or New York, with those listing within China more likely to have questionable business models, accounting and corporate governance."
4
The problem with this post, and other like it, is that it assumes the stated earnings are accurate. They are not. All Chinese companies keep 2 sets of books, and the one they report to Beijing is exaggerated. It is common knowledge that 5 - 7 % of the "official" GDP number is pure fabrication. The true extent of fabrication in company earnings is, at this time, the great unknown.
9
Accounting issues are only a small part of the problem. The main issue with Chinese stocks is that getting cash to shareholders is a relatively low priority compared to American companies. In the weak economy of the last 6 years, the profit margins of American companies have hit all time highs as has the percentage of profits paid out in dividends and buybacks. American companies slashed workers and capital investment. When growth slows in China (as it is starting to) there will be tremendous pressure to maintain employment and continue wasteful investment especially at the state owned companies so cash that could have gone to shareholders won't. For better or worse, American companies work for shareholders. Chinese companies don't. When people see this play out in the next recession you could see prices drop 75% from here.
4
I know almost nothing about these companies, or the Shanghai market. However, looking only at the data presented in this article, seems to me that the average price has returned, or almost returned, to a reasonable level. In the long run, moreover, the growth of the Chinese economy and the growing maturity of the companies and the markets suggest to me that China should be in the portfolio of anyone seeking long-term returns. Finally, remember that nobody, I mean nobody, is good at predicting turning points.
So I guess if I were a brokerage, my recommendation on Chinese stocks would be "hold."
So I guess if I were a brokerage, my recommendation on Chinese stocks would be "hold."
1
Markets usually overshoot on the upside and downside.I would guess there is more downside coming.
It seems odd that you would leave out the amount of margin lending. To me that is the key difference between this bubble and the last one.
5
My thoughts exactly. The margin calls coming about en masse seems to be a much bigger driver than just a market correction
1
Real growth is only about 4%. Gov figures are rigged
3
That stock chart says one thing: NASDAQ.
1
You make it sound like the Chinese investing in their own country's stock market is just like the Americans doing it but it isn't. China is a a 1 party state and the state controlled media doesn't say critical things about the Chinese economy or stock market. They just mouth the party line. Because of their lack of real information on the Chinese economy & market, it's much harder for the typical Chinese investor to know how and where to invest than it is for Americans. If a Chinese investor says something critical about the Chinese stock market on the internet, there's even a chance she'll go to jail
4
The US is a one-party state too -- the corporate state.
4
Yeah, I've always heard that the investor with the best information will be positioned to make the best decision. Those with incomplete information lose or are gambling. Give the opacity of Chinese corporate book keeping and the Chinese state control of journalists - how can any Chinese investor really think they have "good" information. They have to know at some level that they are gambling - and the house wins in gambling.
As someone who just returned to the USA in July, 2014 after living for 8 years in China I can add something: Attempting to "make sense" of many things that happen in China is a losing game. Chinese will pick a stock because it has an "auspicious" sounding name, for example. Chinese retire much earlier than Americans and many retirees have nothing but time on their hands and will therefore spend many hours poring over stock reports and buying and selling without really knowing what they're doing. It's like a game to them and the average Chinese loves gambling. What fascinates me the most, however, is the totally conflicted feelings many Chinese have towards their government. They hate it but expect it to swoop in and solve every problem and become furious when it either can't or won't. Why do you think there are so many "mass incidents" and the government is so obsessed with "security?"
25
As someone who has lived in America for the last 60 years I can add something to your comment on Chinese stock picking. Americans will pick a stock based solely on its name as well, for example because it has .com at the end of its name many stocks that had literally no business plan were valued in the 100's of millions and even billions. Many of these companies never made a dime much less a profit. Of course during our high tech bubble most of these crashed and burned as well. Its not a Chinese thing or an American trait it a HUMAN trait.
3
Not really that different from this country. Lotteries? Stop the gummint from messin' with my Medicare? Same old same old. People are babies the world over.
2
Let me expand on this interesting comment in a different way. I cheerfully confess that I don't understand money, but this is an example of why. If you can lose 32% of your wealth in a month, but nothing that exists in the physical world has changed, then how are you less wealthy? I mean this to be deliberately naive. This wealth only ever existed as potential, or more precisely, it was only ever potential wealth, not real. If it was real wealth, and it was lost, where did it go? If one-third of my house is destroyed in a fire, I know what happened to it.
I get futures in relation to commodities. But in general our whole system of endowing an abstract substance called "money" with superhuman power, as if it actually exists like a force such as gravity, puzzles me as much as medieval people believing in witchcraft. A thousand years from now people will look at how we lived in fear of "volatility" and "crashes" the way we look at ancient Romans reading the flight of birds to decide military campaigns and elections. So the whole system to me seems to depend on taking the auspices ("consumer confidence", for example) and numerology and faith in a human-constructed power that doesn't actually exist but is treated as if it's beyond our control.
I get futures in relation to commodities. But in general our whole system of endowing an abstract substance called "money" with superhuman power, as if it actually exists like a force such as gravity, puzzles me as much as medieval people believing in witchcraft. A thousand years from now people will look at how we lived in fear of "volatility" and "crashes" the way we look at ancient Romans reading the flight of birds to decide military campaigns and elections. So the whole system to me seems to depend on taking the auspices ("consumer confidence", for example) and numerology and faith in a human-constructed power that doesn't actually exist but is treated as if it's beyond our control.
1
The long and (especially) the short is liquid assets. There's something about 'smoke and mirrors' securities markets: eventually the smoke clears and the mirrors reflect the truth: global securities markets are interrelated and fallout from a major market will impact negatively on other securities markets. Tight coupling and interactive complexity in any systems subject to 'black swan' events will counter the prevailing wisdom of 'free enterprise' without regulation. We seen this long movie in 2008-present that morphed from benign compliance of subprime underwriting into a failure in the exotic derivatives markets that were coupled to the bad mortgage securities that were packaged and sold like a financial virus to global banks. The same deal is happening in China that is hell-bent on overcoming the USA in all aspects of business and science to prove that one party rule (forget the oligarchicy and corruption) provides superior governance to the two-party rule and 'rights' burdened governance. The lack of transparency and tight coupling with China will come back to haunt western nations that are, in-turn, highly coupled to the US economy and the stability of the EC-Euro zone, now infected with a Greek Flu.
2
The author is assuming that the Chinese equity market is not rigged. When the communists inform the brokers to buy stock they do. Can you imagine Secretary Lew insisting that Wells Fargo, Merrill Lynch, Citi, J.P. Morgan to buy shares?
Second their margin percentage is at an all time high.
Third, I read on Friday that brokers were going to take home buildings for collateral for margin bets. Can you imagine a broker in the US or Europe taking on that kind of exposure on an illiquid asset?
Betting or investing in the Chineses stock mainland stock market is for suckers.
Second their margin percentage is at an all time high.
Third, I read on Friday that brokers were going to take home buildings for collateral for margin bets. Can you imagine a broker in the US or Europe taking on that kind of exposure on an illiquid asset?
Betting or investing in the Chineses stock mainland stock market is for suckers.
5
Have you not heard of the Greenspan/Bernanke/Yellen put? Not different in practice. "Stocks only go up!"
1
You can't be seriously comparing China's equity markets to the US? Yes, we have the Plunge Protection Team and as you mention the Bernanke put but China's regulatory environment for stocks is almost non-existent, opaque and their accounting gimmickery borders on Fantasy Island.
The PBOC has been loaning money that it 100% state controlled for the purpose of buying stocks. The FED doesn't buy stocks directly. Yes, they bail out banksters. Yes, there is the Plunge Protection Team. But that is a far cry from the state owned bank loaning money to a state owned conduit to facilitate equity buying..
The PBOC has been loaning money that it 100% state controlled for the purpose of buying stocks. The FED doesn't buy stocks directly. Yes, they bail out banksters. Yes, there is the Plunge Protection Team. But that is a far cry from the state owned bank loaning money to a state owned conduit to facilitate equity buying..
My sense is that the American media tends to cheer a little too much at any sign of weakness in the Chinese economy. I've been hearing for around 5 years now how China is a bubble about to pop, and it hasn't happened. I'm therefore a little skeptical of the current claim.
7
I don't think it's just an excitement to stick it to China - I think it's more a novelty to have any news FROM China. They keep such a tight lid on their citizens that ANY news is news.
Also, our last housing bubble was obviously a bubble for several years before it reached a head - when income was wildly decoupled from the cost of real estate and you thought you'd never see the end of the rise of housing prices. We just had to wait until it was upon us to be sure where the end valley or plateau was.
Also, our last housing bubble was obviously a bubble for several years before it reached a head - when income was wildly decoupled from the cost of real estate and you thought you'd never see the end of the rise of housing prices. We just had to wait until it was upon us to be sure where the end valley or plateau was.
There is an underlying problem in China that seems to get some notice by those writing about climate change, but ignored by those reporting on financial issues: massive pollution of air, water and soil.
To even begin to remedy the problem will require massive change in the direction the country is headed currently, resulting in equally massive changes in the economy. To sustain growth levels of even 7% per year, will require continuation of current energy policies for another generation, making much of China a toxic and unsustainable place.
China has much less to fear from the West than it does from the results of its growth in the last twenty years.
To even begin to remedy the problem will require massive change in the direction the country is headed currently, resulting in equally massive changes in the economy. To sustain growth levels of even 7% per year, will require continuation of current energy policies for another generation, making much of China a toxic and unsustainable place.
China has much less to fear from the West than it does from the results of its growth in the last twenty years.
29
Very true. but too simple to convince people who don't have the same opinion already.
In the case of water I would say that the shortage is an even bigger stressor than the pollution. The pollution of air is decreasing I heard. THe soil is definitely degrading and being polluted, but I still would say that water shortage is going to be the biggest problem by far. An upside is that they will temporarily get more water in the rivers as a consequence melting ice in the mountains because of climate change.
In the case of water I would say that the shortage is an even bigger stressor than the pollution. The pollution of air is decreasing I heard. THe soil is definitely degrading and being polluted, but I still would say that water shortage is going to be the biggest problem by far. An upside is that they will temporarily get more water in the rivers as a consequence melting ice in the mountains because of climate change.
As the article points out, "the sharp rise in Chinese share prices...took place without an accompanying rise in earnings...because investors were willing to pay more for the same return." This is a classic mistake. The China market seriously is overbought, and those little "investors" who are fueling this bubble are the least able to afford it as the bubble bursts. The social consequences could be enormous for China, and the rest of the world, if the consequences cannot be confined to China.
3
Recall that, according to the US Senate Banking Committee, "more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligation) ratings were the immediate trigger for the financial crisis," in the US.
The Times may wish to point out that there is no corresponding mass downgrade event occurring in China at the moment. This gives us great confidence that there may be market manipulation by outside forces, specifically the same Western financial institutions that fueled the great recession and subsequent decline.
(Of course, given the amount of revenue the Times receives from Western, New York City-based financial institutions, we do not expect the paper to accurately report on this issue.)
These is not question that that prior estimates of the outlook for Chinese shares have not been accurate and that these firms may have been "among global short sellers trying to talk down the market."
These institutions may want to exit the Chinese market with the help of the Chinese Government.
The Times may wish to point out that there is no corresponding mass downgrade event occurring in China at the moment. This gives us great confidence that there may be market manipulation by outside forces, specifically the same Western financial institutions that fueled the great recession and subsequent decline.
(Of course, given the amount of revenue the Times receives from Western, New York City-based financial institutions, we do not expect the paper to accurately report on this issue.)
These is not question that that prior estimates of the outlook for Chinese shares have not been accurate and that these firms may have been "among global short sellers trying to talk down the market."
These institutions may want to exit the Chinese market with the help of the Chinese Government.
3
It is very difficult to manipulate a market in which you do not have and cannot have a meaningful stake.
1
I don't think this applies to China. ??? Down grading of what? By whom?
There would be a number of issues in evaluating Chinese stocks:
1. Are the earnings real? What accounting methods are used, and who audits the books? Anyone familiar with the low level of business and official ethics in China would have serious questions about the numbers.
2. Are the companies still controlled by insiders who started them and ran them? Are they primarily concerned with diverting the earnings into their own pockets, rather than reinvesting in the business or paying out to shareholders? Do the shareholders have any real say in corporate governance? Are the boards of directors just rubber-stamps?
3. How will the shareholders get paid? Is there sufficient cash flow to pay dividends? Are the companies likely to be bought out at a fat price? Real earnings are fine, but there must be a mechanism for them to wind up in the stockholders pockets.
1. Are the earnings real? What accounting methods are used, and who audits the books? Anyone familiar with the low level of business and official ethics in China would have serious questions about the numbers.
2. Are the companies still controlled by insiders who started them and ran them? Are they primarily concerned with diverting the earnings into their own pockets, rather than reinvesting in the business or paying out to shareholders? Do the shareholders have any real say in corporate governance? Are the boards of directors just rubber-stamps?
3. How will the shareholders get paid? Is there sufficient cash flow to pay dividends? Are the companies likely to be bought out at a fat price? Real earnings are fine, but there must be a mechanism for them to wind up in the stockholders pockets.
17
Two problems that may make it different this time round is the volume and the source. The sheer number of people investing is greater than the previous boom/bust (no where else to invest), and even more than that, many of the individual investors are trading on borrowed money (interest rates so low). This means if the boom goes bust, it will affect many more people, much more tragically.
Hence, the frantic intervention of the government. A bust this time round has the potential to be a greater social disaster in China (even if irrelevant to the world economy) and it will surely hinder the transition to domestic-consumption driven economy as well. The Chinese people's and government's trepidation of this plummeting is not far-fetched.
Hence, the frantic intervention of the government. A bust this time round has the potential to be a greater social disaster in China (even if irrelevant to the world economy) and it will surely hinder the transition to domestic-consumption driven economy as well. The Chinese people's and government's trepidation of this plummeting is not far-fetched.
16
1. Market correction is a good thing.
2. The average investors in the Chinese stock market are less sophisticated than their American counterparts. Most American stocks are hold by insurance company, mutual/pension funds and upper-middle class and above investors. These groups are not likely to buy and sell stock frequently because there are no alternative investment so they act as a stabilizing force.
By contrast. Because of the higher Chinese saving rate and expensive real estate, middle-class and below have saving to put into the stock market. These unsophisticated investors will buy into bubble and sell in a burst. Where are the institutional investors and upper-middle class and above? Real estate in China and oversea.
2. The average investors in the Chinese stock market are less sophisticated than their American counterparts. Most American stocks are hold by insurance company, mutual/pension funds and upper-middle class and above investors. These groups are not likely to buy and sell stock frequently because there are no alternative investment so they act as a stabilizing force.
By contrast. Because of the higher Chinese saving rate and expensive real estate, middle-class and below have saving to put into the stock market. These unsophisticated investors will buy into bubble and sell in a burst. Where are the institutional investors and upper-middle class and above? Real estate in China and oversea.
13
On behalf of those that did not lose any money - What a great stock market lesson! There are thousands of protests each year in China over unfair land sales and pollution. The Chinese economy is run by government and back up by the Ministry of Security. If the fall in Chinese stock prices affect the global economy you may see some consequences.
1
Investor maturity in any country must be developed over time. China is no exception. As this article reported, investing in stock market is a middle class or upper middle class pass-time at the moment. Most of these new investors lack the sophistication and historic perspectives on investing. When the annual growth rate of a country is about 7%, it is unreasonable to expect the stock market in general has a performance much higher than 7% over the long run. But this is a lesson people in China must learn as well. If the government intervention can dampen the magnitude of the oscillation in price by a little, it should not have extreme impact to the Chinese economy. In fact, the large majority of people in China do not invest in stock market. For the moment, most people are not betting in the stock market with their lunch money.
6