Greenspan chimes in on Chinese stockmarkets

I've written a couple of posts lately about the possibilities of a stockmarket bubble in China (More signs of a Chinese stockmarket bubble, 5/13/07, and Makings of a Chinese Stockmarket Bubble?, 4/29/07) . According to the New York Times (5/25/07), former Fed Chairman Alan Greenspan has chimed in as well. According to the Time article:

Mr. Greenspan, now 81, struggled to contain the tech stock boom, issuing his famous “irrational exuberance” warning in December 1996 only to watch the American market keep rising and finally collapse in early 2000. He tried his hand at forecasting Chinese stocks on Wednesday, telling an audience in Madrid by satellite that the Chinese market was “clearly unsustainable” and could undergo a “dramatic contraction.”

After setting records on Monday, Tuesday and Wednesday, the A shares, those traded in yuan, fell 0.47 percent in Shanghai and 0.6 percent in Shenzhen on Thursday as investors responded to the warning.

But the warning was not news to Mr. Zhou and other Chinese officials. The central bank, securities regulators and prominent business executives have all been cautioning investors that buying stocks is not a guaranteed path to riches — all with less apparent effect than Mr. Greenspan.

To reiterate my earlier warnings, developments in China can (and has) effects on an increasingly inter-linked, globalized financial markets.

More signs of a Chinese stockmarket bubble

According to the Financial Times [in Bourses in China eclipse all of Asia (May 9, 2007)]: "The value of shares traded on China’s stock markets on Wednesday was greater than the rest of Asia combined – including Japan – helping the benchmark index to breach the 4,000 mark for the first time. Analysts said this was almost certainly the first time that turnover at the Chinese bourses had exceeded that of the rest of Asia." (Although, it should be noted, that the Chinese stockmarkets in Shanghai and Shenzhen are still substantially smaller than the markets in Japan, the UK, and the US, in terms of market capitalisation.)

This is more evidence for some of the comments I made in previous posts on China's financial sector ... the latest post being Makings of a Chinese Stockmarket Bubble? (April 29, 2007). A financial bubble (that bursts ... as they invariably do) in China could have devastating consequences for markets (and economies) of other countries (including the US, the UK, and Europe). It's definitely worth keeping an eye on developments in China.

Makings of a Chinese Stockmarket Bubble?

China is in the midst of a stockmarket frenzy. According to an article in The Economist magazine (April 26, 2007), new accounts at stock brokers are being opened at a rate of more than 200,000 a day (e.g., more than 310,000 on April 24th of this year). Many of these punters are relatively new to the market and are often either unsophisticated or relatively low-income (including, students and old-age pensioners).

What is fueling this madness for stocks? Despite a couple of scares earlier this year (February 27, and April 19), phenomenal returns (for now). E.g., the Shanghai Stock Exchange's composite index rose by about 130% in 2006 (and is still rising). (See the chart below.)


Having seen some newspieces from China Central Television's channel 4 news on the latest stockmarket craze, I can see how much the stockmarket has permeated daily life in China.

It's worth noting that another factor, besides hyperbolic returns, is driving this 'investing' frenzy -- consumer technology. By "consumer technology" I don't mean China's equivalent of tech stocks (although I'm sure they are enjoying a boom). Instead, it is the growing availability of communcation devices like cell phones, instant messaging, and broadband Internet connections that have reinforced and further enabled this stockmarket 'madness of crowds.'

So is this a bubble? It certainly has all of the earmarks of a stockmarket bubble that will eventually burst. The recent past has demonstrated that Chinese stockmarkets (in Shanghai and Shenzhen) are vulnerable to market volatility as well as to macroeconomic shocks and policy changes by the Chinese Communist Party.

One of those Chinese would-be investors, when describing China's stockmarkets, quoted by The Economist summed it up best: "It's like a casino set up by the Communist Party." If the CCP isn't careful, they will find themselves in quandry (which they may already be in). A rising stockmarket keeps the public (especially the growing middle class) mollified and gives the CCP more credibility. On the other hand, a bubble that burst could cause widespread anger toward the CCP. As Western capitalists can attest to, it is rather difficult (if not impossible) to reconcile those two agendas.