China’s massive 4 trillion yuan stimulus package appears to be successfully fomenting another credit and stock market bubble in the country. Chinese banks are estimated to have lent 7.3 trillion renminbi (~$1 trillion) in the first half of 2009 alone, compared to Rmb4.9 trillion in all of 2008, Rmb3.6 trillion in 2007, and Rmb 3.2 trillion in 2006. At the end of June, loans outstanding were 34.4% higher than a year ago and M2 grew by 28.5% year-to-date; two clear signs of an overheated market.
Providing further evidence of a forming bubble, the Shanghai A-share market has jumped by ~70% year-to-date. Further, individual investors have seemingly forgotten the stock market meltdown last year, opening more than 1.6 million stock trading accounts in June – 68% more than the year before (and certainly a good sign of the speculative juices forming in the country). While the headline GDP growth number of 7.9% confirms a clear rebound in the economy, investors ought to be concerned with the massive growth in bank lending – much of it directed by government officials. Further, the uses of this newfound liquidity should raise a significant red flag to discerning investors - some economists suggest that as much as 15% or $145 billion has been diverted into speculation and real estate.
Unfortunately, it is exceedingly difficult to call the top of a speculative bubble and I suspect that we are only seeing the beginning of what is to come in China. With over $2.13 trillion of government reserves and banks acting as agents for the state, the Chinese stock market could continue to be buoyed by an easy lending environment. Chinese officials have yet to raise interest rates or increase reserve requirements; actions which popped the previous bubble. In the absence of these actions, which presumably would curtail bank lending, I would refrain from shorting the Chinese market. Like investors who thought the Nasdaq was “irrationally exuberant” in 1996, only when lending begins to decline and liquidity is drained from the system, is it safe to short an overheated market. Just as an inability of CLECs to refinance their bloated capital structures served as the peak in the tech/telecom bubble, so will bankruptcies in China’s most speculative companies provide the all clear sign to short the market. Though until that point, which could remain years away, I would patiently observe from the sidelines.
Over the coming months/quarters (and potentially years!), I’ll be on the lookout for the proverbial canaries in the coal mine.
Providing further evidence of a forming bubble, the Shanghai A-share market has jumped by ~70% year-to-date. Further, individual investors have seemingly forgotten the stock market meltdown last year, opening more than 1.6 million stock trading accounts in June – 68% more than the year before (and certainly a good sign of the speculative juices forming in the country). While the headline GDP growth number of 7.9% confirms a clear rebound in the economy, investors ought to be concerned with the massive growth in bank lending – much of it directed by government officials. Further, the uses of this newfound liquidity should raise a significant red flag to discerning investors - some economists suggest that as much as 15% or $145 billion has been diverted into speculation and real estate.
Unfortunately, it is exceedingly difficult to call the top of a speculative bubble and I suspect that we are only seeing the beginning of what is to come in China. With over $2.13 trillion of government reserves and banks acting as agents for the state, the Chinese stock market could continue to be buoyed by an easy lending environment. Chinese officials have yet to raise interest rates or increase reserve requirements; actions which popped the previous bubble. In the absence of these actions, which presumably would curtail bank lending, I would refrain from shorting the Chinese market. Like investors who thought the Nasdaq was “irrationally exuberant” in 1996, only when lending begins to decline and liquidity is drained from the system, is it safe to short an overheated market. Just as an inability of CLECs to refinance their bloated capital structures served as the peak in the tech/telecom bubble, so will bankruptcies in China’s most speculative companies provide the all clear sign to short the market. Though until that point, which could remain years away, I would patiently observe from the sidelines.
Over the coming months/quarters (and potentially years!), I’ll be on the lookout for the proverbial canaries in the coal mine.
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