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Monday, May 25, 2015

Chinese Stock Market Irrational Exuberance

It was only a month ago that I last written an article on the China stock market (article here). Back then, I mentioned how the dragon has risen from 1,900 all the way to 3,700. The index is now at 4,800 and everyone is predicting it will only a matter of time before it reaches 5,000. The Chinese stock market rally is finally back on. There was only one word to describe this phenomenal bull run: Incredible.






Cheap Intervention?

We have been hearing a lot of news that there was a lot of margin account traders who has leveraged to participate in this bull run. I even highlighted in my previous article how people of all ages and education, some of whom with very few financial knowledge, who has participated in this long awaited bull run. We have heard the quote that when even the shoe boy has purchased shares, it's better to run away with the money. Now, we even have cleaners in China who have done the same. Perhaps a sign?

The US Federal Reserve infamous monetary policy over the last few years have fuelled the American market's recovery with a series of bond purchases and interest rate cuts. Record high were seen in the stock market, even though the economy remained weak with low inflation and low GDP growth. Now, the same can be said for the Chinese central government intervention.

Has it ever occurred weird to you that during the Chinese economic boom period when growth rates were above 10%, investors were not as bullish on the stock market as they were now when growth has stalled and they can barely forecast a 7%.

That's not surprising given a purpose intervention by the Chinese Central Government to convince investors to fuel the stock market by having a succession series of interest rate cuts in recent months. And they are making it very easy for investors to do so with the use of margin leveraging, even to the extent of using pension funds to invest in stocks.

One reason why I think the government is doing so is because too much debt is being tied up in the property market, which has stalled for growth and economy is slowing as a result without fuel for demand. As a result, they are doing this with plenty of agenda behind their own back by pushing money into the stock market and fueling for growth so that economy can pick up, but at what consequences at the end of the day. You and I will know when that happens. It won't end up pretty like how it started.


15 comments:

  1. Irrational exuberance once again?

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    1. Hi Lizardo

      Not sure if I get what you mean by that.

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    2. It seems like a reflection of the Dot.Com era of crazy valuations. I'm reminded of the level of irrational exuberance that the Chinese stock market is presently experiencing. Stock just go vertical. The fall is equally dramatic.

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    3. Ahh i see. They do look a resemblance of the early milennium but we'll see if this will make a lost decade once again like it previously did.

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  2. Hi B,

    Do you know if China stocks listed in Singapore are following the same trend as it is for their China counterpart recently (with irrational exeuberance)?

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    Replies
    1. Hi Seekay

      Yes some of which like cmph, yzj and yanlord have all benefited from the rising chinese market as a whole. The sti market is really lackluster though.

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  3. It's true most stocks listed on SSE are with rich valuation now. But there are few things worth noting: 1. China stock market is one with long bear and short bull, and the bull market, when it comes, is a crazy one like what we are seeing now. 2. Even in this bull market, some sectors, like banking and property development, are still depressed due to investors' pessimistic view about Chinese slowing economy. 3. I feel today's China is a lot like US in the 20's, with decades of blooming economy and increasing wealth. Just hope there won't be a 1929 crush.

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    Replies
    1. Hi Anonymous

      Thanks for your view.

      They are indeed just rising after stimulus is introduced so im guessing theres more room to run more for now. As investors we hope there wont be too much impact on the people who has leveraged for this one but sadly it looks like it will bring every market down when it happens.

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    2. Thanks for your reply. I came back to see your comment.
      I'm a Chinese and I know how Chinese like to, or I should put it, it's the human nature, to gamble. Right now a lot of people feel if they don't invest, they lost out. They feel if I have a profit of 10000RMB and my neighbour has 20000RMB, I am losing.
      In that regard, does it make sense to divest stocks that in our portfolio that are operating in China? e.g, your CMPH.

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    3. and it plummeted 6.5% today

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    4. Hi Anonymous

      Indeed they fell 6.5% today, maybe taking some breather. Scary volatility.

      I am still positive on the overall development on CMPH, including what I think they will make another acquisition by the end of the year, and their cashflow is very healthy. So I'll keep this for now, and will continue to add if it goes down drastically because of the chinese market.

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  4. This bull cycle is fueled by leverage. Using 10 times leverage, 10% move means 100% return. The Shanghai index more than doubled, or 10 times if using leverage, in a few month. The mood in the street is melting. My China cousin told me now in their office, they joke , whoever come to work today is another loser.

    But when it collapses, it will be a long time bear. Obviously China market is not a mature market. Many listed companies will fade out. Not a ground for long term investors. But heaven for speculators.

    Best way for sg investors is to buy china index tracking fund listed in hongkong. But not now pls. China market not for weak heart.

    China market is purely driven by its own liquidity. Hard to say how much is the spill over effect. China companies listed here is sgx are generally not good quality as compared to hk or shanghai/shenzhen. Be careful.

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    1. Hi Richard

      Many thanks for your view.

      The chinese companies listed here is indeed not of a good quality afterall who wants to rase capital in sg market when they could do so in hk.

      I fear for the spill over effects when that happens. It seems almost inevitable that we all know what could happen next when the music ends but theres little we can do to prevent the whole situation from coming in. Could this be another lost decade? We are midway through the decade right now.

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  5. Incredible what has happened in only a few short months! It's impossible to know when situations like this will come to a grinding halt, but the best we can do is at least plan for the worst case scenario and avoid getting caught up in the enthusiasm and taking too much risk. I certainly wouldn't want to be highly leveraged into that stock market at this point, even if it still has some way to run!

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    1. Hi Jason

      I would have been a happy man if I participate in the rally, similar to what the Dow has enjoyed over the past couple of years. The danger is when the uptrend will stop and do a reverse turnaround. If the going up is fast, the down will be faster.

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