Implications of a China Crash

Roger Nusbaum submits: All things China continue to go berserk.

The new listing in Shanghai for Bank of Communications surged 71% on its IPO.

The Chinese stocks I follow are mostly up a lot over the last few weeks, not as much as the Shanghai market, but they do seem to be capturing a lot of the effect.

The Shanghai exchange has about tripled in the last year and a half. It has been a wild ride for a relatively new stock market.

If the market cracks, crashes or does anything else nasty it makes sense to expect other markets to react. I don't really get the wave of commentary that says otherwise -- it seems that other markets would in fact feel a China meltdown.

However that does not have to mean that there is a fundamental reason for all other markets to go down with China. I would suspect that a reaction in sympathy could retrace rather quickly. Here though you need to think in terms of weeks, not days.

It seems that most of the big, short term, "Vs" in the U.S. market over the last ten years or so have needed six weeks or so to retrace.

You should be less afraid of a V shaped move than a U shaped move.

Comments

[john gaats]

All market go up for one fundamnetal reason, imprecise pricing. When Chinese market crashes for that reason, you better be able to find one with precise pricing. Otherwise, you will learn the lesson when that happens. Betting a U-shaped Chinese crash and a V-shaped our own market crash is funamentally flawed. majority of big multinationals draw significant income from China. So our investors have to be really bullish to discount those factors.
It seems to me that most Chinese investors bet a sustained bull while most non-Chinese bet otherwise.

[Roger Nusbaum]

you are a quant and I am not. we will view things differently. The market pricing in everything perfectly does not always ring true.

My opinion is that a V, caused by China or whatever else, would look like other Vs. Because it doesn't jibe with your view it is fundamentally flawed?

[Griegger6]

I think the US market will bust and bring down the chinese market. For quite some time now I've been watching my local area in the northeast deteriorating as factories are and have been closing as the production moved overseas. Most people who have real estate that I know have been supplementing their living standard with it. The area now seems to be replaced with much more real estate, and businesses that supply things directly to consumers. The US is a 12 trillion $ economy with 8.8 trillion of debt. As foreigners horde more dollars and produce more to be exported to the US, the US is producing less and piling up more debt. I have noticed recently the massive amount of houses for sale in my local newspaper and the condos and multifamily houses that are still in construction within blocks of each other. Also, people used to talk in the billions in the 90's, now people talk in the trillions. Money is becoming worth-less and history shows that rampant money supply does not have a happy ending. So, eventually the imbalances will have to be balanced and as the US goes down it will take down China with it. No V or U but L.

[chamois16]

This thread seems mistitled. There is no rationale presented for a China crash and no argument made for any particular consequence, should one occur . I can find no "implications.&qu... The U or V issue seems trivial in the absence of magnitude, for reasons cited in earlier comments

The PRC mainland markets may well be seriously overbought, and that may bring pain to local speculators, but the economy, in absence of persuasive rationale, seems sustainable through the Olympics and beyond. The Government has established infrastructure, such as state owned funds and QDII destination expansion, to support where and when needed.

The PRC challenge is to shift to a domestic consumption-based economy before there are more serious problems among the importing nations.

[Mike Reddy]

A new, multi-Trillion dollar market economy is hatching from its shell in China and yeah, its market and related markets will bounce around in the process. So what?

[Roger Nusbaum]

the so what i was getting to was to think now about what you would do if China does get hit instead of reacting on the fly after the fact.

[izomax]

Most people don't realize this fact:

There are only 35-40 million active investors in China, that's only 3% of the total population.

At the height of U.S. bubble, over 40% of the U.S. population were investing in stocks.

China's 10 year bull run is just the beginning.

[Roger Nusbaum]

i think i saw 70 million somewhere but i agree with your point in a way.

even at 40 million that is a lot of people participating in a tiny market dollar wise.

you probably know that there are rules that are being changed (not sure the timing) that will allow local investors to invest over seas which could, if managed properly, relieve some of the buying pressure in shanghai.

[iddjjs]

Actually, as early as in 2001 when the China market was at a height then, there were 70mil accnts. However, most accounts were opened to catch new IPOs - a special phenomenon for China that an IPO would guarantee to make you 50% or more so everyone wants to get in IPO. So, the Chinese built a lottery type of system, which in tern encouraged many to open as many accnts as possible to increase the chance to get the IPO. So, a conservative guess was that, among that 70 mil accnts, at most there were 25 mil active investors. Now, another 20 mil accnts have been opened since then, so a real count of 50 mil active investors is a reasonable guess now. And that 50mil is just 3.9% of the total population. So izomax is correct.

One thing I want to add is that, it takes a lot more for foreigners to understand Chinese. I’ve seen so many crying babies that are calling “wolf is coming” with regards to China. This happened 20 years ago when China’s economy had just entered the 10th year of high GDP growth of 8~10% yearly after its economic reform. So many of world renowned western economists were predicting a catastrophic crash down for Chinese economy then. What happened 20 years later? China’s GDP is still growing at 10% a year, and China’s economy has grown another 300%! Now China’s stock market has just started to catch up its GDP growth after a 60% slump from 2001’s 2500 to 10/2005’s 980, yet western analysts are jumping out crying “wolf is coming” again. Stop! Grow up and stop the crying! The trend is your friend, follow it! I think lots of QFIIs are starting to understand the real facts. You should to!

[Richard Dommer]

jim.sun, With respect to the issue of retail Chinese investor activity, is the following data (quoted from a recent Goldman Sacs research report) not correct?

The participation of domestic retail investors in the Chinese equity market has gone through the roof. The total number of domestic individual equity accounts was 94 million, or over 7% of population, as of April 30, according to Goldman Sachs. In contrast, only 5% of the population had equity accounts in 2001.
"Moreover, new account opening is accelerating at a lightning pace--new individual account openings on April 30 alone exceeded 1 million, and total new individual account openings in April exceeded the sum of [those opened in] 2005 and 2006," said Goldman Sachs economist Hong Liang in a separate research report Thursday. "As a result, about 17% of the total existing accounts were opened just in the past 4 months."
www.marketwatch.com/ne...={EF44CF90-18BC-46E3-A...

[iddjjs]

Richard, GS's numbers with regards to accnts match that of mine - 5% of population (1.3bn) is roughly 70mil, and 7% today is about 90mil. What that 70mil then however had a lot of water in it. The actual active investors then were estimated just 25mil. In any event, comparing 7% to US' investment population of roughly 50% at the 2000 was a far cry. Where is the "over heating"? Let's look from another angle, Chinese people has the world's second highest saving rates at 25.5% (compare that with -0.5% of US saving rate). In the past 18 months when the market had been "over heating", only 3~4% of the savings had flown into the stock market. If another 10% savings flow into the market, then the index may reach 10,000pts.

GS is one of the biggest cry babies currently in China. I actually watched its Asian market's cheaf economist's interview in HK. She had admitted that China's trailing PE ratio was at 30s and the earnings growth is strong, so the market wasn't really "over heating", just grew a little too fast, that's all. A research report found out that GS got out of the A-share market a little too early at 2500 ~ 3000 range. After that A-share market continued to grow up to 4000 mark, so it had been left out cold. That's why you heard a lot of negative comments recently from GS people in almost every occations, pushing hard for Chinese government to issue some kind of measures to cool down the market. What's the purpose behind it is obvious, right?

China's A-share market will not crash, period. Not at this level, not at 5000, not even at 6000. It will reach 5000 by year end, and move up 20% a year or more thereafter for the foreseeable future. Just sit tight and watch.

[Richard Dommer]

jim.sum, Thanks for the comments.

[iddjjs]

A bit more credible infomation about the accnt numbers from authority - just read a news today that the Chairman of CSRC, China's version of SEC, said last week that among 95mil total accnts existing, his guess is that only 30mil are active investors. He said there are 35mil "dead accnts". Since China has two stock markets- Shanghai and Shenzhen, to trade the stocks in both markets, one needs to open separate accnts in both markets, so the Chairman said that the remaining 60mil accnts are probably owned by 30mil active investors. His conclusion is that China's so called "whole-nation trading mania" isn't as serious as it sounded.

[Richard Dommer]

jim.sum, This morning I ran across this paper and found it to be a very interesting review of the 150yr history of Chinese capital markets. Thought you might also find it interesting.

"Stock Market in China's Modernization Process---- Its past, present and future prospects",
Zhiwu Chen, Yale School of Management, June 1, 2006
icf.som.yale.edu/resea...

The author notes near the end of the paper, as you have in comments above, the apparent disconnect between the Shanghai market and GDP growth in 2001-05 and also that this happened before (though in reverse - rising market w/ falling GDP) between 1994-99. He does observe that the HK "H-shares" market more closely correlates with actual PRC economy. He speculates on cause(s) for the apparent disconnects in the Shanghai and Shenzhen markets with GDP.