The great wall of money / Economist on the Chinese Stock Market

drinking the cool aid.......i think this time they simplify some arguments...

alles kein problem......ich denke aber das es sich die autoren diesesmal zu einfach gemacht haben.....

China's economy may be less vulnerable to a bursting of the stockmarket bubble than it appears

.....What is peculiar about China's stockmarket is that government officials, the PBOC, the media, investment bankers, not to mention Li Ka-shing, Hong Kong's richest tycoon, and Alan Greenspan, the former chairman of the Federal Reserve, have all warned that it looks like a bubble. This is in striking contrast to most bubbles, notably in dotcom shares and America's housing market, where most officials and financiers remained in denial until they popped. Chinese shares certainly look expensive, with an average price-earnings ratio of almost 50 (based on historic profits). But p/e ratios are hard to interpret when profits are growing so strongly. Over the past decade China's p/e ratio has averaged 37, much higher than elsewhere.

> pe´s doesn´t matter...have heard this before....

> kgv´s sind nicht länger relevant....habe das irgendwo schon einmal gehört.......

According to Goldman Sachs, firms listed on the A-share market enjoyed an average 82% increase in profits in the year to the first quarter. It is also worth noting that China's recent surge followed many years of decline. As a result, China has been the worst performer among the BRIC economies—Brazil, Russia, India and China—since 2003 when the global bull market began (see left-hand chart).

this famous chart from mish tells another story.....

Assume for the moment that this rally is in fact a bubble and that it eventually bursts; what would be the impact on China's economy? Newspapers abound with stories suggesting that everybody from students and pensioners to cleaners and taxi drivers is playing the stockmarket.

like this story via russ winter http://tinyurl.com/2h8sbw

Xiao Feng, a former investment consultant at a futures company in Nanjing, put his three apartments and two vehicles - worth 5 million yuan - up as collateral days ago to get a 10 million yuan loan to invest in the stock market. But the cost of borrowing is high - with an annual interest rate of 25 percent, he’ll have to pay the lender 2.5 million yuan in interest at the end of the year, reported the Nanjing Morning Post on Wednesday. In addition, the lender will monitor his stock trading account. If the value of Xiao’s portfolio drops below 8 million yuan, the lender will liquidate his stock holdings to prevent a further decrease in the principal, spelling a loss of two million for Xiao. When the 2.5-million interest payment is also taken into account, Xiao Feng will lose what he has worked for in the past 10 years - all his collateral.

If true, a collapse in share prices would bring the whole economy down with it. But China's stockmarket is still relatively small, so price movements—up or down—have less impact on spending than elsewhere. Despite the surge in share ownership this year, only 7% of the population own shares, reckons Hong Liang, an economist at Goldman Sachs, compared with around half of all Americans.

>to me this is a weak argument. the majority of chinese live in rural areas close to the poverty level and don´t consume at all........

>denke das diese argument nicht so dolle ist. die mehrheit der chinesen lebt noch immer von der landwirtschadt nahe der armutsgrenze und trägt nichts zum konsum bei.....

A panda or a grizzly bear
The total value of tradable shares—that is, excluding those held by the government—is only 25% of GDP (the market capitalisation is nearly 80%). This compares with 150% in America and over 100% in India (see right-hand chart). And according to an article in the latest China Economic Quarterly, a large chunk of tradable shares is actually held by state firms and government agencies, so the true exposure of individuals is even smaller.

that makes this news even more amazing.... http://tinyurl.com/3cr24c

Wednesday’s figure of $49bn was nearly double Japan’s $26.9bn turnover, and triple the $16.5bn combined trading volume of Australia, Hong Kong, Thailand, Singapore, Malaysia, Korea, India, Taiwan, Indonesia, New Zealand and Vietnam

Swings in share prices affect an economy in two main ways. The first is through the “wealth effect”: higher share prices encourage consumers to spend more; they then pull in their belts when share prices plunge. When Chinese share prices collapsed by 55% from 2001 to 2005, consumer spending and GDP growth proved robust. Today there are more shareholders, but their holdings are still small. Equities account for less than 15% of Chinese households' total financial assets, compared with half of those of American households' (including their pension funds). In America the share-price boom in the late 1990s made people think that they no longer needed to save, but in China there has been little sign over the past year that people are saving much less; the boom in retail sales has largely matched faster growth in income. If consumers have not spent their capital gains, then a slump in share prices should not have much impact either.

The second channel through which share prices usually affect an economy is the cost of capital; higher share prices make it cheaper for firms to raise equity finance and so they invest more. But only a small proportion of Chinese companies are listed on the stock exchange and those that are rely more on internal finance. About 60% of private-sector investment is funded from companies' own profits and another 20% from banks; issuing shares accounts for only 10%. A stockmarket crash will therefore not make much of a dent on investment.

The direct economic impact of a fall in Chinese share prices would therefore be modest. Some indirect effects could be larger. For instance, the psychological impact of a sharp sell-off could severely puncture consumer confidence. Chinese authorities are also nervous about social and political instability among angry students who have bet their tuition money on shares, or pensioners who have blown their life savings.

Another indirect threat is the impact of a collapse in Chinese shares on other markets. A 9% drop in Chinese share prices in late February triggered a brief global sell-off. Given the frothy state of many global financial markets, a full-blown crash in China might thus do more harm abroad than at home. Financial instability could be China's next unwelcome export.