This simple statistic says it all. In 2005 the Shanghai Composite stood at 1,000 points. By close of play this morning, it had passed 4,000.
Is this a boom without precedent? Answer: no. From 1921 to 1929 the Dow Jones Industrial average leapt from 100 to 400 points, and then, of course, it crashed. In just two and half years during the late ’90s the NASDAQ went from 1,000 to 4,600 points, before it crashed. And the history books are littered with more examples of similar runs ending in tears.
The experts have told us it must end. Earlier this month Zhou Xiaochuan, governor of the People’s Bank of China, described the recent wave of surging Chinese stocks as a bubble. Last week, former chairman of the US Federal bank Alan Greenspan warned the market was seriously overvalued.
Arguably itâ€™s the bankers and fund mangers who have their ears placed even closer to the ground than central bankers. Here too the warnings are many. For example, Hugh Young, managing director at Aberdeen Asset Management Asia in Singapore, recently said China: “is another one of these classic hot and speculative markets that will end in tears.”
The statistics are quite simply staggering. Last week, saw 300,000 Chinese people open brokerage accounts every day. Yesterday, the China stock market saw the value of shares pass $50 billion, compared to just $43.9 billion on the New York Stock Exchange last Friday, which was the last full day of trading in the US.
The trouble is this: professional investors aren’t pushing up prices, itâ€™s consumers. The Chinese tend to be big on savings; typically they save around a quarter of their disposable income. But the rate of interest in China is just two per cent, while inflation is around three per cent, and it’s showing signs of increasing too. According to Chinese ministry of commerce figures, the price of pork in 36 cities has soared by over 40 per cent in just 12 months.
So if the effective savings rate is negative, what do you do with your money? Answer: stick it on the stock market.
But perhaps it all boils down to one statistic. According to Bloomberg, stocks listed on the key Chinese index – the CSI 300 – are now valued at 46 times earnings.
One can easily draw comparisons with the dotcom bubble. Of course the internet was a good idea; of course the potential for growth was enormous, but the markets went too far ahead of themselves and the fall out was nasty.
History also tells us that markets often crash when private investors start driving up prices. Joseph Kennedy, father of the then future president, famously sold his stocks in 1929 after a taxi driver asked for his advice. The clever man reasoned that when stocks and shares had taken on such mass market awareness it was time to get out.
The Chinese government has warned students not to put their money into shares, but you have to feel sorry for Chinese citizens who are diligently saving but have nowhere to put their money. From the objective position of several thousand miles away, it’s tempting to conclude they would be better off spending. It’s quite ironic, in a way. In the UK, the baby boomers’ generation are spending when they should be saving for the day when the numbers of retired people outnumber the workers. On the other hand, they are saving in China, where saving appears to be a sure fire way of losing money, either to the ravages of inflation or the roulette wheel of the Chinese stock market.
But here is a further irony. In India – that other great developing economy – , growth is being fed by consumers. The money supply is expanding fast and loans to consumers are helping to boost the economy.
And that brings us to Indian shares. According to Capital Economics, since 2002, India’s benchmark Sensex index has risen by 338 per cent – more than double the gain in China over this period.
We said above you have to feel sorry for the Chinese savers, who have nowhere safe to put their money. But then again, western savers have a similar dilemma: where exactly can one go at the moment without fearing a bubble?
© Investment & Business News 2013