JPMorgan Chase and BlackRock disagree about China’s stock bubble. The former says last week’s 13 percent share plunge is a reason to buy; the latter sees things “deflating quite rapidly.”
So who is right? JPMorgan is correct in the very short run. Chinese President Xi Jinping’s (習近平) government has fueled China’s bull market and it will do all in its power to sustain it. However, in the months ahead, the odds favor BlackRock’s take, which is based on the Warren Buffett school of financial analysis.
“The tide is going to go out, and there’s going to be a lot of people without their swimming trunks on,” strategist Ewen Cameron Watt of BlackRock told Bloomberg Television, borrowing from Buffett’s observation about investors caught swimming naked when markets get shaky.
Considering the sudden wave of sell orders in Shanghai and Shenzhen, we are about to witness a surge of investors caught skinny dipping. The math behind Chinese stock markets’ more than US$6 trillion surge over the past 12 months makes less sense by the day. Shares on mainland exchanges are trading at an average of about 256 times reported earnings, making China’s market mania of 2007 look rational by comparison.
The question is, can Beijing put a bottom under history’s biggest equity bubble?
As JPMorgan strategist Adrian Mowat sees it, “policy makers will step in if the market correction gets beyond a comfortable level. I would imagine if the correction continues [this] week you will hear something reassuring.”
He is not necessarily wrong for the moment. China will indeed throw everything it has at the market: central bank rate cuts, tweaking margin-trading rules, slowing the pace of initial public offerings, talking up share prices, you name it.
What is wrong, though, is the belief that China can prevent the crash of a market already defying the most wildly optimistic of economic scenarios. Beijing cannot do it anymore than Tokyo could in 1990, Seoul in 1997 or Washington in 2008.
China is reaching the limits of its ability to prolong a rally that turned 928 days old on Friday last week. Beijing has encouraged companies to pursue splashy initial public offerings to sustain the excitement on stock markets, and lure Chinese households to open trading accounts. The thought is that if average Chinese feel wealthy, they will buy into Xi’s vision of a “China Dream” and the legitimacy of the Chinese Communist Party.
However, the market bubble has grown to unsustainable proportions. The median stock, for instance, has a price-to-earnings ratio of 98, while the Shanghai Composite, which has a heavy weighting toward low-priced bank shares, is valued at 23 times.
The reason bank shares are so depressed, of course, is China’s dueling bubble in debt. China has US$28 trillion of public and private debt; then there is the unprecedented US$363 billion of margin debt that is supporting shares.
It does not help that China’s economic fundamentals have turned for the worse. As Bloomberg Intelligence analyst Kenneth Hoffman detailed in a report on Friday, Chinese demand for steel is collapsing.
On Thursday, Bloomberg’s steel profitability lost US$37 per tonne, hitting a record low. Chinese manufacturing activity could be in for a “major decline,” even if Beijing ramps up its stimulus programs, Hoffman wrote.
That may explain the breadth of last week’s selloff. Among 10 industry groups in the CSI 300 Index of the biggest Chinese shares, technology, telecom and industrial companies plunged most — at least 15 percent.
The ChiNext Index of small-cap stocks slumped 5.4 percent on Friday alone, extending losses to 17 percent since a record high on June 3.
The selloff suggests China’s stimulate-growth-via-stocks plan may be approaching an endgame. The government will surely try to backstop the market: Xi needs to maintain the aura of Chinese government omnipotence.
However, there will come a time when the tide turns and the market gets away from Beijing, proving that the world’s most exciting stock rally has no clothes. It may soon be upon us.
Stephen Garrett, a 27-year-old graduate student, always thought he would study in China, but first the country’s restrictive COVID-19 policies made it nearly impossible and now he has other concerns. The cost is one deterrent, but Garrett is more worried about restrictions on academic freedom and the personal risk of being stranded in China. He is not alone. Only about 700 American students are studying at Chinese universities, down from a peak of nearly 25,000 a decade ago, while there are nearly 300,000 Chinese students at US schools. Some young Americans are discouraged from investing their time in China by what they see
MAJOR DROP: CEO Tim Cook, who is visiting Hanoi, pledged the firm was committed to Vietnam after its smartphone shipments declined 9.6% annually in the first quarter Apple Inc yesterday said it would increase spending on suppliers in Vietnam, a key production hub, as CEO Tim Cook arrived in the country for a two-day visit. The iPhone maker announced the news in a statement on its Web site, but gave no details of how much it would spend or where the money would go. Cook is expected to meet programmers, content creators and students during his visit, online newspaper VnExpress reported. The visit comes as US President Joe Biden’s administration seeks to ramp up Vietnam’s role in the global tech supply chain to reduce the US’ dependence on China. Images on
New apartments in Taiwan’s major cities are getting smaller, while old apartments are increasingly occupied by older people, many of whom live alone, government data showed. The phenomenon has to do with sharpening unaffordable property prices and an aging population, property brokers said. Apartments with one bedroom that are two years old or older have gained a noticeable presence in the nation’s six special municipalities as well as Hsinchu county and city in the past five years, Evertrust Rehouse Co (永慶房產集團) found, citing data from the government’s real-price transaction platform. In Taipei, apartments with one bedroom accounted for 19 percent of deals last
US CONSCULTANT: The US Department of Commerce’s Ursula Burns is a rarely seen US government consultant to be put forward to sit on the board, nominated as an independent director Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world’s largest contract chipmaker, yesterday nominated 10 candidates for its new board of directors, including Ursula Burns from the US Department of Commerce. It is rare that TSMC has nominated a US government consultant to sit on its board. Burns was nominated as one of seven independent directors. She is vice chair of the department’s Advisory Council on Supply Chain Competitiveness. Burns is to stand for election at TSMC’s annual shareholders’ meeting on June 4 along with the rest of the candidates. TSMC chairman Mark Liu (劉德音) was not on the list after in December last