The Chinese stock market crash
There are a lot of articles lately about the Chinese stock market crash. Many of them says it’s the signal that the Chinese economy will have a hard landing, that will have consequences for the economy of all countries in general. While it’s true that China is growing at a slower rate than the last years, the stock market is not a measure of the performance of the chinese economy. Since 2010, the Chinese economy has been growing at rates near 10% and the stock market has been stagnant, and newspapers ignored the fact and I saw no big headlines. Now, the situation is the same but crash sells, so let’s make the fonts bigger.
In theory the value of the stock of a company is supposed to reflect the performance of this company, and expectations of future performance. In western countries this is true… sometimes. In China it’s never true. It happened before, in 2006-2007, and what is happening now is exactly what happened back there (but at a lower scale)
In November 2005, the Shanghai index was at 1000 points. Suddenly, it became fashion to invest in the stock market, and by October 2006, one year later, it had doubled. By October 2007 it was at 6000 points…
During 2007 many milion of chinese that had no idea took their savings and bought stocks of whatever company, just because their neighbours were doing the same. Screen with stocks graphs appeared everywhere: banks, on the street, even in supermarkets. Some of our employees told me they were putting 100% of their salaries in the stock market. Our Hangzhou office is located in an office building and I remember seeing how, in offices that did trading of clothing or other goods, they suddenly installed big screens with the stock valuations, and they were all glued to the screen following the market. In effect, they forgot about their core business and centered in the stock market. We had suppliers who made mortgages on the factory to get money and invested it on the stock market.
During half a year I was probably the least popular guy in China, advising all my friends to get out of the market before the bubble burst… but the market kept going up, non stop.
So, what happens when millions of chinese that have never invested and have no idea enter the market? The Shanghai index went from 2000 to 6000 points in a year. Then the government stanted getting worried, and articles against this craze began appearing in the official newspapers. This and some new laws that the government introduced to curve speculation turned the tide, people started selling and milions of chinese suddenly realized that they could loose money in the stock market! So everybody hurried to sell, and the market went down from 6000 to 1700 in 11 monthes. When the market passed 4000 the government began trying to stop the fall, to no avail.
Some well informed people made a lot money, but a lot of people, most of the ones that had no experience and entered the market with the neighbour, lost a lot. A couple of suppliers that we had closed the factories because they lost everyting.
So the screens disappeared, people went back to business and the market craze stopped. After that, for some years nobody wanted to hear about stocks, so in spite of the growing chinese economy the market stayed between 2000 and 3000 points.
Until last year, when again I saw graphs everywhere. This time there were no screens in the supermarkets, no need because everybody was glued to the screen of their mobile phone, following some app tracking the stocks. History repeats itself, and the market grew from 2000 to 4500 in a year, when the tide turned. Now it has fallen to 3000 and we have big headlines, the end of China and so on, even though the fall (and the rise) is much lower than it was in 2006. Luckily, the leverage in China is very low, most common people invest their savings. So when the bubble blows, they loose their savings but they don’t loose everything as happens in western countries.
The government is now trying to stop the decline of the market. My bet is that the market will eventually stop, same as it did in 2006. From my point of view, it’s no big deal. Chinese economy is not in the best shape this year, but the stock market is no indicator. In China, property market is a much better indicator of economic health.