Could the phenomenal growth train get derailed?
I remember my colleague Clive Granger telling me over a year ago about the conversations he had with people when traveling China. Everyone he spoke with seemed to believe that (1) the Chinese stock market was at that time experiencing a bubble that was going to burst, and (2) the crash would not come until after the 2008 Olympics. Clive expressed amusement that no one seemed to have worked backwards from this presumed equilibrium– if you know the market is going to crash in August 2008, anybody with any sense would sell in July. And if there’s heavy selling volume in July, the market’s heading down, not up at that point, so the logical thing to do is to get out in June. But if the crash is going to begin in June, then what you should really do is….
I was reminded of Clive’s remarks when I saw CR’s graph of the 50% plunge in the Shanghai Composite since late last year.
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So why didn’t you tell us this story a year ago, you ask? Sorry– it slipped my mind until just now.
Calculated Risk went on to connect a few more dots, asking what might happen to China’s economy if higher transportation costs indeed start to reverse the recent growth in world trade.
Not to worry, though. Yesterday the CSI 300 surged back up over 5%. And besides, the Olympic Games are still a couple of months away.
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Interestingly though, the last time I checked (a few weeks ago), the market cap of the Shanghai index has continued to increase – due to increased share issuance. I believe the WSJ reported on this a while back.
Shanghai fell 6.54% overnight, revesring the prior night’s gain and then some.
But only a tiny proportion of Chinese investment is funded through stocks. Overwhelmingly it is via retained earnings and banks. Who have been seeing very strong rates of returns on their increased earnings.
See this report by Goldman Sachs
http://www2.goldmansachs.com/ideas/brics/book/BRICs-Chapter4.pdf
I am reading that GDP will be up due to the building from the earthquake, exceeding what was destroyed.
I was told the same story last September and October (as Clive’s) and my advice was “sell after the first week of the new year” — I would still be a bit late but not too bad. Unfortunately, nobody took my advice seriously. 🙁
My observation is that the standard financial analysis is not so useful in Chinese stock market (and real estate market) for various reasons. The behavior analysis makes more sense. Also, government policy is a huge factor. For one, the market is not deep enough to make government intervention difficult and the government does get involved frequently. For another, everyone trades on inside information — or so they think. Thus the market is very susceptible to government manipulations.
I’ll just stick with my basic belief that the Chinese market, and other emerging countries stock markets are just the high beta portion of the one world stock market. Note that it peaked at about the same time as the US market.
spencer,
On the assumption that Chinese households have better access to China’s equity market than markets abroad, I would think that there is a built-in tendency for Chinese stocks to overheat until household portfolios stabilize. The Chinese middle class hasn’t had good access to stock markets for very long, and the middle class is getting bigger. There should be a very drawn-out “one-time adjustment” as China’s equity market absorb’s the adjustment to these two factors. After that adjustment, the market should become less volatile and have a less steep trajectory, on average.
One thing to note when talking about world economic growth is that the DryDocks Shipping index tanked last week.
We are in an unusual cycle. We are late in the cycle and I’m seeing minor signs all over the place that tenuously suggest we are peaking — for example copper prices have been in the same narrow band for two years. But none of them are really rolling over like they would in a classic recession scenario. It is one of the reason that I’ve been giving a stagnation scenario top probability for well over a year.
kharris– I suspect that you are being too rational.
The comments cited by CR that the professor says connect more dots point me not to China but to the US.
Bloomberg points out that the yuan has appreciated 20% against he dollar yet the NYTimes cautions about Chinese inflation. If a 20% decline against the dollar is inflation what is happening in the US?
Developing countries like China, India and Brazil can no longer be ignored. There is a good chance that Brazil will become one of the most important providers of energy sources in the world. Not their ethanol production but their oil exploration.
Krugman rightfully shows concern for fuel prices but consider that the the US is paying 20% more for fuel than the Chinese if the currency numbers noted by Bloomberg are true.
The US congress is slowly but surely destroying the oil business in the US driving it off shore. The US influence will continue to wane as long as investors are threatened with “excess profits” taxes and draconian regulations. Would you invest in oil production if you were facing up to a 10 year payback on your investment and even then facing the possibility that the government would take anything you made. It is not economics 101, it is common sense 101.
Spencer –
A source of difference in market volatility between service-heavy economies (the U.S.) and good-producing-heavy economies (China) is that the former are much less sensitive to cyclical swings, becuse the accelerator-multiplier mechanism can deal the latter a crippling blow in a downturn.
Another potential victim of the a-m mechanism may be Germany, owing to its substantial exports of capital goods.
I would second & extend Don’s point that China will suffer a negative swing of greater magnitude than the US. Because they have under the influence of artificially low interest rates, currency pegging, & politically awarded capital deployed resources excessively to make export goods, the demand for which is unsustainable.
Diminished US & European demand will generate more unemployment in China than the US or Europe. Higher transport cost just exacerbates this.
I wonder what effect the Chinese raising their oil prices by 18% will have on our prices at the Big Box Mart. It seems as if the Chinese companies will pass the additional expense on to the consumer. And since the consumer is the US, I guess we should expect inflation on Chinese produced goods. There is no way the Fed nor the Treasury can fix this inflation since their currency is pegged to ours.
This article has nothing to do with biz cycle…
Anyway, i think the demand reaction to last week’s fuel price hike is more interesting… Imo the downstream demand should be resilient, so expect to see crude continue to be strong.
Don’t read too much of the random mad dashes (not walks) of Chinese stock prices.