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.
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Since April 19, 2007
- James Yetman
- Hong Kong
- I teach Macroeconomics at the University of Hong Kong. I use this blog to write about macroeconomic developments in Hong Kong, answer interesting students posed by my students, and discuss anything else that interests me and seems vaguely on-topic.
Blog Archive
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2007
(164)
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May
(35)
- Where is the Bottom?
- Pop Goes the Bubble (2) ????
- Pop Goes the Bubble...
- A quick recent history of the Hong Kong Economy...
- Evidence of Competence
- Property Rights....
- Ignorance is NOT bliss....
- How to Pop a Stock Market Bubble...
- Bubbles Continued....
- Growing Consensus on China....
- Will China be the leading nation in the 21st century?
- Monetary Policy and Dragon Slaying
- The "Forever Stamp"
- Chinese Monetary Policy... Divisible by 9....
- Hong Kong's Monetary Policy... continued
- Hong Kong's Monetary Policy
- Zimbabwe Inflation.... 3731%
- The Mainland Chinese Bubble
- Universities... Iraq Style
- The North Korean Model....
- Money vs. Legal Tender
- Sticky Prices...
- Numbers....
- Mainland Chinese Inflation
- China Bubble...
- Zimbabwe.... at the UN
- Hyperinflation.... Yugoslavian Edition
- The Economics of Charitable Giving....
- Predicting Exchange Rates... using Politics
- A Common Currency for Asia?
- So You Want to Go to Harvard?
- Unrest in Macau... lessons for China
- Blogging Economists
- China's Golden Week
- Greenspan Speaks on US Housing Equity Withdrawal....
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May
(35)
3 comments:
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?
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.
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