(no subject)

[randomness]

I missed this post when it came out. The Chinese stock markets are really booming. It's like 1929! or 1999.

Deutsche Bank, quoted in FT Alphaville:

Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!

From the same article in Alphaville:

It seems everyone in the country is racing to open a brokerage account – 1.67m new accounts in the latest week, according to the China Securities Depository and Clearing Co. That sounds a lot, although it is growth of only about 1 per cent a week in the total of new accounts: China, remember is big.

They go on to make some comparisons between the current state of the Shenzhen and Shanghai markets and that of the Russell 2000.

"Past performance is no guarantee", etc. I wonder when the music's going to stop?

Comments

[drwex]

Looking at this with outsider's ignorant eyes, I don't think it's ever going to "stop."

The reason is that the Chinese have a violent allergy to sudden change. An allergy so violent they will call out tanks and shoot their own children (students) rather than risk it happening. Therefore what I believe will happen is that when the run rate needs to come down word will be passed quietly that those who wish to continue to enjoy their lucrative government contracts will wind down their activities according the the following reasonable and gentle schedule. Those who don't play ball will find themselves on the receiving end of unpleasantly detailed corruption investigations, or will find their ability to partner with Chinese companies suddenly mired in red tape. Everyone makes (some) money, nobody goes to jail, and the bubble slowly deflates. No sudden changes.

[r-ness.livejournal.com]

That's certainly the best case scenario from the point of view of the Chinese government!

That said, I think that requires a level of financial and social engineering I don't know that the Chinese authorities are actually capable of. Outsiders tend to ascribe a level of competence and control by the Chinese authorities that they simply don't have. Shooting their own kids was a matter of losing control, and a fine example of sudden change they weren't able to deal with.

The parallel to the best case scenario you posit with the 1989 events is that the kids protest, sit in for a while, the authorities wait them out, make them unpopular with the residents, who have to deal with the fact that there's an Occupy movement in the middle of town, and the protestors quietly go away having failed to change anything. A few people go to jail, no one dies, and everyone forgets about the protest. No sudden changes.

They were incapable of pulling that off. (Although I note that the Hong Kong authorities, with 25 years of hindsight, basically managed to pull it off. But they're much more skilled at public relations than the Chinese authorities were, because for one thing they actually hold elections, though of a rather emasculated, gerrymandered kind. Similarly I think the Hong Kong authorities are much better at handling a financial crash, since they actually have experience with them. But as anyone in China will tell you, Hong Kong is a problem smaller by more than two orders of magnitude. Its solutions don't scale, they keep saying.)

I agree that the Chinese government will lean on foreigners in the ways you say. But that's just normal practice in China: lean on the foreigners. The problem is that this bubble is much bigger than a bunch of foreign companies and their contracts, and can't be solved just by screwing foreigners. If only it were that easy.

Leaning on the rich, powerful Chinese that are involved in all this is a very delicate, very messy can of worms, not least because these rich, powerful Chinese are usually part of the government. Some of them will have to lose. Which ones end up losing is the very delicate, very messy bit. They won't go quietly, and they have real power. Power to derail corruption investigations, launch opposing ones, and generally fight back.

The next post from the FT pretty much ended with how the government fails to have any good idea of what it's doing. As with the rest of analyses on China and its government that describe it as a single entity I feel like this is a misleading oversimplification, but it does capture some of the lack of clarity.

Finally, it's not that the Chinese have a violent allergy to sudden change. There are over a billion Chinese. Some like change, some don't. It's that the current government has an allergy to any change, sudden or gradual, that might put them out of a job. It appears to blunder into sudden change more often than is comfortable. It's just good at the "I meant to do that" thing cats are known for.

[drwex]

the Hong Kong authorities, with 25 years of hindsight, basically managed to pull it off

My point exactly. We used to mock the Chinese declarations that they could censor the entire Internet, too. It's true that Hong Kong is smaller than China, but it's not smaller than the number of players in the market (I guesstimate).

I understand the point FT is trying to make, but I think it's unwise to underestimate the ability of Beijing to socially engineer solutions.

[r-ness.livejournal.com]

We used to mock the Chinese declarations that they could censor the entire Internet, too. It's true that Hong Kong is smaller than China, but it's not smaller than the number of players in the market (I guesstimate).

You're factually incorrect on both of those points. For the first point, have a look at chinasmack.com sometime. For the second point the linked report from the China Securities Depository and Clearing Co. shows more brokerage accounts in each of the Shanghai and Shenzhen exchanges than there are people in Hong Kong.

But no matter. We'll see how it all comes out by and by.

I think it's unwise to underestimate the ability of Beijing to socially engineer solutions.

I think the Chinese authorities can do many things, including mitigate the effects of a market crash in ways Western governments can't. What they can't do is prevent a market crash itself. which is what I (and I think the FT) are actually talking about. On that score I think you're talking about a completely different issue than I am.

As I said, we'll see.

[achinhibitor.livejournal.com]

What could possibly go wrong???

[achinhibitor.livejournal.com]

I think it's worse than that. The last phase of a bubble is when a class of players that normally isn't in that market starts coming in. (E.g., in the three booms in big US office buildings, the "last fools" were foreigners, Britons the first two times and Japanese the last time.) Part of what drives this is when the experienced players start realizing that the market is going to crash and they start looking for greater fools to sell to. So I suspect that many of the more sophisticated and connected players are getting out of the Chinese stock market and much more ordinary folks are getting in. The government can say what it wants, but the best-connected folk are probably cashing out right now, and the herds are one day going to panic and run. And there's a longstanding Chinese belief that there are runs of luck, which can apply to particular stocks as easily as to particular roulette wheels, and that if a stock is lucky, it's worth betting everything on it. That means that the herds are going to rush in to a hot market without much concern for the increasing risk of a crash.