Shanghai Stock Market: Bubble Days are here again

Posted by: Frederik Balfour on July 29, 2009

How do you spell stock market bubble? S-H-A-N-G-H-A-I. China’s main share market is up 80% this year, and some IPOs have skyrocketed several times their offer price on the first day of trading. Sichuan Expressway soared 300%, repeat 300% on its opening day of trading on Monday July 27, and China State Construction Engineering Corporation surged 70% today, July 29, even as the Shanghai Stock Index plunged 5%. Of course that might just be due to a sell-off in most other stocks so people could climb onto the IPO bandwagon. Chinese investors routinely liquidate existing positions to pile into new issues.

But let’s face it, Pigs Don’t Fly, not even in China. The febrile enthusiasm exhibited by Chinese investors in this latest market rally, shows that nothing was learned from the market rout that started in late 2007. If anything, people are desperate to plough back into the stock market to make up for previous losses. In China, the risk of missing a rally is more important to many punters than the potential downside should there be a correction. See my story Suckers Rally. Oh, and let’s not forget to mention that Shanghai has overtaken Japan as the world’s second largest stock market.

It’s important to remember that China’s stock market is still something of a black box. The China Securities Regulatory Commission’s vetting process of IPOs is anything but transparent, and you can bet that when there’s so much money to be made from listings, that corruption is inevitable. There’s a long list of firms in the queue to IPO, and the CRSC gets to decide who goes and who waits. One can well imagine how companies are willing to grease the wheels of bureaucracy to tap markets at a time like this when things are so hot. “They need listing rules to be more transparent and standardized so companies don’t have to kowtow and lobby [to the CSRC] the head of investment banking in China at an international bank told me a few weeks ago.

How long the current rally will last is anyone’s guess. Valuations are already nearly as high as they were when the last bubble burst. But with Beijing encouraging banks to pump money into the economy—lending was up more than 200% year on year in the first six months—much of this money will find its way into the stock market, regardless of what purpose for which it was originally borrowed.

Reader Comments

hock

July 29, 2009 5:05 AM

The Chinese has a traditional liking towards gambling. Shanghai bubble will soon end in tears. And will be repeated many times over. It's current administration has made the same mistakes of Japan then trying to be no.1 and bailout the US after Black Monday in October 1987, where BOJ flooded the market with liquidity and bank lending increased rapidly. If China SOEs are all listed on the exchange at current PE, the the market capitalization will probably be more than US$10 trillion. When this bubble spiral further upwards the Chinese are going to get into very serious trouble.

ej

July 29, 2009 10:29 AM

GREED IS BACK.....PREPARE FOR A SHARP CRASH NEXT MONTH
....

Interconnect

July 29, 2009 3:23 PM

Similarities of Karachi in Pakistan and
Shanghai in China. Karachi stock exchange index was at 14000, now at 7000+. City District Government Karachi developing the model city on the pattern of Shanghai with the Mayor of Karachi and Shanghai helping and cooperation for joint development efforts. REIT companies haven't taken off in Karachi, but it's an excellent to buy, buy at the Karachi Stock Exchange.

jambo

July 29, 2009 3:31 PM

Chinese can't bear to lose money and they look for ways to invest as little as possible and make the maximum. This is whay they rather knock off than innovate. Let someone else do the RandD and steal their ideas. This is why u may never see a Chinese Steve Jobs, because they r all waiting for someone else to come out with the cool idea.

When the bubble explodes in Shanghai, there will be shock and pain. Well, this is what happens when u play the game. U can lose and lose big. If u can't handle the potential losses, then don't play.

DK

July 30, 2009 7:33 AM

What is new? Stock markets all over the world are about repetitive boom and bust days. When the market is on the upswing, it does not need a genius to recognize a stock market bubble growing . On the other hand, if you journalists were able to recognize the subprime bubble before it burst, that really would be something.

C. H. Ng

July 30, 2009 8:46 AM

@Ej....Are you an expert on the China share market or a fortune teller who can predict how her market will go??

jcage

July 31, 2009 12:52 AM

The Shanghai stock market is up again today so what is the issue? Stock go up and down and specially in this volatiles market! I guess that next time it come down again, then Balfour can fill a page to just say "I told you so"!
I can't wait for BW to go just bankrupt or outsourced to India and the rest of BW old gang get fired!

buttercookies2002

July 31, 2009 10:19 AM

@ Jcage. You got it right, BW has bankrupt and now looking for buyer!
Check this out.. http://www.time.com/time/business/article/0,8599,1911239,00.html

jcage

August 3, 2009 11:29 PM

Interesting read buttercookies2002, thank you!
The interesting fact is that readership for BusinessWeek has been going down while readership for Fortune and Forbe are going up in the same market environment! I guess that is related to the poor quality of BW!
BW has given us quality material such as
"India vs China", Why unemployment rate won't go double digit for this recession, Oh, If the USA go into a recession, then China will suffer a 1929 type of depression, the sending of a Man to the Moon did not bring any technical or technological achievement etc.. You get the feeling that they were just paid to filled page and page and they care little for the quality of the report! I guess that it has something to do with the weekly format that does not give them enough time to do proper research so they get sloppy and they shortcut!

pathetic

August 4, 2009 12:39 AM

more crap from the eye on asia crowd. you notice that it's never anything positive. balfour, you have been predicting this china crash for over 6 months, when is it gonna happen.

weren't the western "journalist" also predicting the collapse of hong kong when it was handed over to china in 1997. what happened to that "prediction"?

i guess white men will never learn.

balfour@pathetic

August 4, 2009 12:52 AM

Dear Pathetic
My opinions are based on reporting from speaking to experts based in China. I suggest you have a read of this article by Andy Xie to get a Chinese take on the bubble situation.

http://www.my1510.cn/article.php?id=e3fc777cdd24720a

For a "positive" post please have a look at my blog of yesterday GM's 78% sales growth.

chinafrica

August 6, 2009 5:20 AM

http://www.paolowoods.net/

ppl has to know, so we can be better

Conrad de Aenlle

August 7, 2009 2:55 PM

Any talk of China being in a bubble is in the context of a tremendous long-term growth story. What few are considering is that demographic factors will cause China’s economy to decelerate for many years, producing very weak performance in its stock market, a la Japan. Have a look here for a discussion of that prospect:

http://moneywatch.bnet.com/investing/blog/against-grain/investors-in-chinese-stocks-patiently-wait-for-the-bubble-to-pop/268/?tag=col1;blog-river

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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