Sunday, December 7, 2014

China bubble? Sign me up!

Hooray! It's bubble time!

Bloomberg - China regulator urges caution on stocks as trading hits record. Bloomberg won't tell you that the quote was within the context of cautioning against investing in fraudulent stocks:
Investors must consider risks while putting money into stocks, China’s securities regulator warned yesterday after a buying spree drove daily trading turnover to above 1 trillion yuan ($163 billion) for the first time.

Illegal activities including stock manipulation have recently been “raising their head” and investors should invest rationally, Deng Ge, a spokesman for the China Securities Regulatory Commission, said in a statement on the agency’s website. A stable market is important for the economy, Ge said.

The Shanghai Composite Index (SHCOMP) advanced 1.3 percent to close at 2,937.65 yesterday, after posting the biggest price swings in four years. The measure gained as much as 2.7 percent and fell 3 percent within the first 90 minutes of trade. For the week, the index jumped 9.5 percent, the most since February 2009.

“I hope investors, especially small and medium investors that are new to the market, invest rationally, respect the market, fear the market and bear in mind the risks present in the stock market,” Ge said.

The Shanghai index’s 21 percent rally over the past month, the most among 93 global indexes tracked by Bloomberg, is spurring investors to open share accounts at the fastest pace in three years and boosting turnover to record highs. The value of shares that changed hands on the Shanghai and Shenzhen stock exchanges surged to a record 1.05 trillion yuan.
So is that the top for the Shanghai market? You think so?


Bespoke - we picked the downtrend break in Shanghai. Since then the market is only up 37%:
Financial market liberalization (including allowing foreigners to hold onshore Chinese equities) is assisting. As a result of connections between Hong Kong and Shanghai, the number of equity brokerage accounts is surging, and new account openings have thus far been highly correlated with Shanghai Composite returns.
Well, when there's a bubble, all you really have to worry about is figuring out when buyers no longer outnumber sellers. If the Chinese are suddenly giving up on savings accounts and pouring money into the equity market, that's actually good for China, isn't it? I mean, that big savings pile was a massive dead weight on their economy. Better to get it moving, no? I dunno, is it?

Bloomberg - Shanghai stocks cap best weekly gain in four years. Here's something that interests me:
The Shanghai Composite’s 39 percent gain this year has driven valuations to 10.9 times 12-month projected earnings, the highest level since July 2011, according to data compiled by Bloomberg.
10.9x forward P/E is not the peak of a bubble, anywhere in the world. 40x forward P/E is a reasonable bubble top for the US. Just a couple years ago, all the BRIC pundits were asserting that a P/E like 10 would undervalue China: why would they change their minds now? Shouldn't Shanghai be able to (unsustainably, sure) hit a 20x-25x forward P/E?

My opinion?

Even if it's a bubble, you want to be there. NASDAQ gained 130% in just the final year of its bubble, and while there indeed were shitty scam stocks participating like EDIG, there were also perfectly good companies like CSCO or EMC whose stocks saw fantastic returns.

And hey, if any of you goldbugs want to shoot your mouths off about how "it's stupid to invest in a bubble", you might want to think back to the junior gold stock market of 2009-2010. That indeed was also an insane bubble, and yet you happily bought all sorts of shitty stocks like Atac and Sabina, didn't you?

Of course you did. Because there was all sorts of money to be made and you would have been an idiot to own SPY when junior miners were flying up.

And what about the scary story that Chinese are trading on margin?

Hell, Americans did the same from 1997 on. It was called options trading. You bought your CSCO call at market, and sold it a week later for a 50% gain. Options are essentially leverage, and yet nobody had a problem with that in the NASDAQ bubble because there was still capital coming into the market to float the share prices themselves.

And picking the top is impossible, right?

Actually, if you look at the NASDAQ chart, it was easy to see the top in retrospect. Volume exploded to new highs but price failed to advance. That was the sign everyone was already all-in and there was nobody left to buy.

And Brent Cook actually picked the top in the juniors, when (I think it was on BNN) he said there was a flood of new paper about to hit market and he didn't know if there was anyone left to buy it. Again, everyone was already all-in and the market could only go down from there.

When does China get to the all-in point? It has nothing to do with P/E; it has to do with how much capital is yet to be deployed into the Shanghai market.

Is there a lot left to be deployed? I really don't know, and that's where it'd be nice to have some data. Otherwise I'm flying without a parachute.

But I don't think 10.9x P/E would be the point where investment capital has been exhausted.

And I don't think the Chinese government is going to let this resolve with a crash. Billy Bishop said that this stock market pop is making Xi look great; a stock market crash would probably be perceived as an extreme negative for Chinese social harmony.

As for gold, I can see three possibilities:

1. Chinese stop buying gold because they've suddenly become more enamoured with the stock market. I guess it's possible, but then again Chinese already stopped buying gold because they're scared of being arrested for corruption.

2. When the Shanghai crash does come, the gold price will crash in the ensuing liquidity crisis. Don't forget, gold crashed during the 2008 crisis in the US: a flood of scrap came onto the market as people jettisoned whatever they could to get liquid.

3. Yeah, someone could argue that a longer-term positive is that, if we instead see a sustained revaluation of the Chinese equity market, the increased wealth will mean new demand for luxury goods, and some winnings will be invested in hard assets. I'm not sure of that: a stock market bubble doesn't create money out of thin air (unless I guess it's funded by shadow banking? which is bad?), which means the money levitating the market right now is money that already exists elsewhere in China. And that money hasn't bought gold, so why would it now? So I doubt it.

In any case, I went and looked up some ETFs with which to play this.

ASHR is a US-listed A-shares ETF, so it seems to have direct exposure to Shanghai. and are TSX-listed ETFs, but they seem to be the more boring FXI- or YAO-type ETFs. Not as exciting.

Personally, I'm going to think about buying the boring Canadian ones for a safer, more sedate exposure to China equity demand. Then again, taking the hit on exchange and buying the crazy-ass Shanghai ETF is more my style, ain't it?

As always, read the small print.

This is not investment advice, a solicitation to buy or sell securities, or anything other than the ravings of a lunatic with a blogger account.


  1. The Chinese have a funny relationship with gold. I go down to the bank to buy some every so often. They think I am just a crazy stupid foreigner who only knows enough Chinese to make his request but can't understand any of their clarifying questions.
    ZH had a yummy looking chart claiming that something like 8000 t of gold has entered China via the Shanghai market in the last five years--which is about 1 g per Chinese person per year. The bank prefers to deal in 1 kg bars (although they have others down to 20 g, minimum). So the typical Chinese is not buying gold.
    Everyone I talk to here dreams of buying a flat. And if they already have one, they dream of buying another. They don't buy gold. They don't buy stocks.

    1. All the China gold talk on places like ZH is pure speculation. What has entered China was probably mostly bought by corrupt local officials.