Friday, May 11, 2007

China Bubble...

The Mainland Chinese stock market is booming, and this makes me nervous. I've spoken to colleagues who cannot visit China without being asked by everyone from taxi drivers up which stocks they should invest in. Stories abound of students investing their university fees in equities in the hope of making a quick profit. Retired people investing all their retirement savings. As a rule of thumb, when everyone else to too eager to invest and doesn't seem to understand the risks involved, the market is suffering from a bubble.... and it's time to sell before the coming correction.

But maybe there is still hope. Even a bubble may ultimately be good for China's economic development. Daniel Gross argues that past bubbles have been good for the US (see here). I hope the same can be argued for China.... but I'm still very skeptical.

3 comments:

羽冰 said...
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yubing said...

Dear Pro Yetman:
How can we tell if an economy is in a bubble or not?

I have been watching TV news lately, and found out that many experts are actually quite optimisitic about the Mainland Stock. They continuously stated that China is NOT in a bubble. Of cource I understand that they did this to raise the public confidence so that the stock market won't collapse quickly. But they can not deny a bubble if statistics say so.

So.. What evidence do you have to say that this is a bubble?

James Yetman said...

It is impossible to "prove" that the stock prices are unsupported by fundamentals and therefore represent a bubble- otherwise bubbles would never exist in the first place! However, anytime a stock market soars, I expect it to move above fundamental levels, which will be followed by a large correction. I believe the Mainland market is in that position now. In the end, it's just my opinion.... I can't prove it.