China stocks like the GCC bubble of 2005-6
Posted on 19 July 2009 with no comments from readers
Money manager Mark Mobius has created quite a stir by suggesting that within three years the Chinese stock market might be more valuable than its US counterpart.
US stocks are presently valued at $11.2 trillion compared with $3.2 trillion for Chinese equities, after a 75 per cent rise in value this year. Last month the IPO for Sanjin Pharmaceuticals was 500 times unsubscribed, and the cable company Wanma raised 638-times its initial public offering.
Stock market bubble
To observers of stock market bubbles the symptoms are obvious and comparable to the GCC bubble of 2005-6: a quick rise in stock prices thanks to cheap money; and IPOs that are massively oversubscribed.
Even Mobius says stocks are ’somewhat overvalued’ and ‘we can expect a correction along the way’. But there is still a fundamental judgment call: are Chinese stocks heading higher or at a cyclical peak, and set to crash to underperformance – like the GCC markets since 2005-6?
The Chinese Achilles heel is clearly its reliance on exports. China relies on exports for 38 per cent of its GDP compared with just 15 per cent, for example, for Japan. It is true not all Chinese exports go to the US, but actually global trade has crashed with remarkable synchronicity all over the world this year. Chinese exports fell 21 per cent year-on-year in June, the ninth monthly decline.
What China has done is to pull a magic wand in the shape of a stimulus package worth 14 per cent of GDP, dwarfing anything seen in the West. The dramatic impact on domestic demand for autos and household goods has boosted GDP to compensate for a huge slump in exports.
Export slump
But the price is steep in terms of risky lending, and indeed a stock market bubble fueled by money borrowed at low interest rates. How long can this rocky edifice be maintained? Long enough to deliver eight per cent annual GDP growth perhaps, but how long will share prices defy gravity if exports do not return?
In truth, the Chinese emperor has no clothes. The export business that made China rich has been smashed by the worst recession since the 1930s, and to expect China to thrive in this environment defies common sense.
Emerging markets typically have dramatic down cycles, and when you hear China is going to overtake the US then it is time to run for cover!
no Comments posted by readers:
IPO’s are massively oversubscribed due to demand and where demand is greater than supply I see it unlikely that this is anything like what happened in Dubai or Saudi. Demand in Dubai is from expatriates. If they got rid of all the expats in the UAE there would hardly be demand for anything in the UAE but in China most of the demand is local and locals aren’t going any where any time soon.
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Are you sure?
Tens of millions of agricultural workers moving into cities each year quickly absorb bubbles. That’s the aim of the stimulus, – - to diversify away from exports to home consumption.