The Chinese stock market is following the weather – It’s getting hotter and hotter

During the past weeks I have read several articles about the rising Chinese stock market. Besides that I attended an informative lecture at Beijing University about “non-performing loans and bubbles in the China economy” by Jack Rodman. The lecture was part of a series about finance in China by professor Michael Pettis. Unfortunately I did not know about this most interesting series before, next week will be it’s last session, I need to check if there are other lectures offered at Beida. But a student already told me that there are other English lectures coming up, so I’ll keep an eye on the schedule there.

When the Chinese economy started to pick up speed, the stock market in Shanghai that was opened in 1990 had a four year period where shareholders would not be happy about their assets: Although China almost had a double-digit GDP growth each year from 2001 to 2005, the stock market did not bring the investors big profit. But then the market slowly picked up speed and since then has more than tripled. I created some graphs to show this development.

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Until the end of 2005 the stock market was rather going down than up but then started to pick up speed.

This success and the easiness of this way to make money had brought new investors to buy stocks, some of them with very little money and with very high risk because they are bringing all their savings to the stock market. Along with the rising temperatures in Beijing (yesterday we had well over 30°C) one can watch the high amount of money flowing into the market: $9.1 billion have been transfered from staving accounts to stocks in the first quarter of 2007.
And although the China Securities Regulatory Commission urges “stock exchanges, securities dealers and related authorities to educate investors about the risks of stock market investment”, not all people are aware of the risk with investing in stocks. Some are taking it as a replacement for gambling that is outlawed in China, but others are blindly following the trend of making money without the need to do any labor. I’ve found a very interesting story about this development – sorry, it’s only in German.
Students at Beijing University I have talked with are a little more careful and although they don’t have any stock investments at the moment, they are “planing to do so in the future”.

It seems everybody in China nowadays has dreams about a good future and become wealthy. In Chinese there can be easily made a word game out of this, as “qian” can mean “future” (前) as well as “money”(钱). With this word game, some people even released a new version of the Chinese national anthem, when the main goal of the country is not to “march forward”, but the “make money”.

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So far there have been only small backdrops that could not stop the rise.

Unfortunately the experiences form the past and other countries have shown that the peak is reached when everybody is going to the stock market. The German newspaper “Die ZEIT” recently called it the game of finding “the dumbest fool”, the one who is investing at last. The game of buying stocks and selling at a higher prize does work as long as there is someone who is willing to pay a higher prize. China traditionally has a high savings ratio, so there potentially is a lot of money that could still flow into to market.

The question is: When will is the weather and the stock market become cooler? And how? Will it become cooler like after a thunderstorm with a brusting bubble or is there a slow decline in temperature?
Our Chinese teacher told us that the Chinese government would be able to control the market – at least to some extend: As the state is still the (main) owner of many companies, it can be selling or buying stocks to keep the prizes stable. But so far the state has been a profiteer of the bullish market since its shares have increased their value. Although members of the government are denying the existence of a bubble, it is questionable if the state really is interested in buying stocks at a high prize after the peak has been reached? Wouldn’t it be in the interest of the state to sell its shares at a high prize and use the money useful? And if the country would pursue such a strategy, why was it possible that the markets have gained more than 50 percent this year?

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