China’s stock market bubble: A goring concern(economist.com)
economist.com
China’s stock market bubble: A goring concern
http://www.economist.com/news/finance-and-economics/21652337-economic-dangers-chinas-manic-bull-market-goring-concern
62 comments
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I find myself noticing that a lot of the solutions that The Economist proposes are very similar - opening markets, decreasing regulation - make everything more "liberal". They always make compelling arguments for their suggestions but I also find myself wondering whether they ever argue for any alternative
Yeah. :-).
You should read the Economics of the Colonial Cringe. I think you'd enjoy it.
http://www.theatlantic.com/technology/archive/1991/10/-quot-...
You should read the Economics of the Colonial Cringe. I think you'd enjoy it.
http://www.theatlantic.com/technology/archive/1991/10/-quot-...
they also advocated for same-sex marriage - in 1996. their liberal, in the classic sense.
their stance on various wars is often questionable though. supported the second iraq invasion.
their stance on various wars is often questionable though. supported the second iraq invasion.
The Economist has always been "The answer is free markets! What was the question?".
I always find it a reassuring read, in the sense that well-written, well-researched, persuasive articles that I disagree with are a sign that I haven't been completely engulfed by my own little information bubble, but take it with a pinch of salt.
I always find it a reassuring read, in the sense that well-written, well-researched, persuasive articles that I disagree with are a sign that I haven't been completely engulfed by my own little information bubble, but take it with a pinch of salt.
I have been a subscriber to the Economist for over 25 years. In recent years, I have noticed a subtle, but noticeable, change from the small-business-friendly to the statist, big-business-friedly tone .
A look at the ownership structure may explain the shift - The Economist is now 50%-owned by big business interests
http://en.wikipedia.org/wiki/Economist_Group
BTW, they endorsed B. Obama for president twice, in 2008 and 2012, who has been, despite all the populist rhetoric, very friendly to Wall Street and big business (not a single Wall Street criminal has been indicted)
I still like them, for the excellent writing, but I find myself agreeing less with them over the past several years.
A look at the ownership structure may explain the shift - The Economist is now 50%-owned by big business interests
http://en.wikipedia.org/wiki/Economist_Group
BTW, they endorsed B. Obama for president twice, in 2008 and 2012, who has been, despite all the populist rhetoric, very friendly to Wall Street and big business (not a single Wall Street criminal has been indicted)
I still like them, for the excellent writing, but I find myself agreeing less with them over the past several years.
Agreed, I used to read them regularly, but found them becoming noticeably more statist. Perhaps when I was younger and less well informed (or less cynical) they just sounded better?
Given their supposedly liberal (old-school) leanings, you'd expect a criticism of large businesses which you don't find anymore.
Given their supposedly liberal (old-school) leanings, you'd expect a criticism of large businesses which you don't find anymore.
Actually having lived in China for a significant period of time I can say that the answer is to remove capital controls on Chinese citizens and allow them to invest anywhere else.
This will deflate the Chinese market bubble(and property bubble) almost immediately, you'll see this happen however when pigs are flying to the moon.
This will deflate the Chinese market bubble(and property bubble) almost immediately, you'll see this happen however when pigs are flying to the moon.
The answer to what question? The policy has to be to defer the bubble collapse as much as possible in hope of the mythical "soft landing". Far more than western countries they depend on continuous economic growth as the tradeoff for lack of political freedom.
So China should export its capital glut to the rest of the world, which already suffers a capital glut?
The Economist hast declined tremendously in my opinion.
Poor researched articles, very short articles with little information. You can build in 1 hour a better blog aggregation with more information.
They are the Jehovah's witnesses of "free markets", or at least what the Economist thinks free markets are.
Very little understanding of the underlying systemic problems we are currently facing.
For me it the Economist has become "noise" in the information jungle.
As a short term solution, I would say they're probably right. However, sane advice would be to look for a sustainable alternative. I guess it's just because they have a liberal bias, but in any case I can't see The Economist proposing a slower, yet more sustainable growth.
"After double-digit growth for much of the past decade, sales have slumped" - you don't say... or perhaps they expect that rate of growth to continue without end? Yes, it was a bubble.
"After double-digit growth for much of the past decade, sales have slumped" - you don't say... or perhaps they expect that rate of growth to continue without end? Yes, it was a bubble.
-Against fuel subsidies in Indonesia [1]
-.. and in general [2]
-For carbon tax [3]
(all imho: ) They are traditional liberal, and / but with a realist approach to economics. Massive market failures exist and need work. Market failures more often originate in government, than that new market failures need more government.
[1] http://www.economist.com/news/asia/21638179-jokowi-abandons-...
[2] http://www.economist.com/news/leaders/21639501-fall-price-oi...
[3] http://www.economist.com/news/leaders/21580146-world-will-on...
-.. and in general [2]
-For carbon tax [3]
(all imho: ) They are traditional liberal, and / but with a realist approach to economics. Massive market failures exist and need work. Market failures more often originate in government, than that new market failures need more government.
[1] http://www.economist.com/news/asia/21638179-jokowi-abandons-...
[2] http://www.economist.com/news/leaders/21639501-fall-price-oi...
[3] http://www.economist.com/news/leaders/21580146-world-will-on...
If you instinctively and intellectually adhere to a system of values, why would you advocate something that goes against it?
> If you instinctively and intellectually adhere to a system of values, why would you advocate something that goes against it?
Because less market regulation is not a value by itself, its a policy, a means to an end. My interpretation of kenny-log_ins' post was the hidden accusation that the Economist doesn't properly seperate the two, and thus falls victim to ideology.
Because less market regulation is not a value by itself, its a policy, a means to an end. My interpretation of kenny-log_ins' post was the hidden accusation that the Economist doesn't properly seperate the two, and thus falls victim to ideology.
Any sane ideologue will admit it's a guide rather than an absolute rule; you might be on the right because you believe free-market approaches are generally better, or on the left because you believe tax-and-spend approaches are generally better, but if you're analysing specific cases rather than just touting your ideology then you should spot at least some exceptions.
They also advocate for things like gun control and health care reform in the US. I believe they've also advocated things like a carbon tax, as they give credence to the scientific consensus on global warming.
They also tend to be fairly 'practical' in their support for candidates. I recall some years ago when they absolutely laid into Silvio Berlusconi and recommended the left-wing candidate despite Berlusconi being, in theory at least, the more 'business friendly' candidate. They rightly argued that he was mostly just friendly to his own businesses.
So, yes, they are 'liberal' in the European sense, but not necessarily 'libertarian' in the US sense.
Edit: their about page is informative: http://www.economist.com/help/about-us#About_Economistcom
They also tend to be fairly 'practical' in their support for candidates. I recall some years ago when they absolutely laid into Silvio Berlusconi and recommended the left-wing candidate despite Berlusconi being, in theory at least, the more 'business friendly' candidate. They rightly argued that he was mostly just friendly to his own businesses.
So, yes, they are 'liberal' in the European sense, but not necessarily 'libertarian' in the US sense.
Edit: their about page is informative: http://www.economist.com/help/about-us#About_Economistcom
>I recall some years ago when they absolutely laid into Silvio Berlusconi and recommended the left-wing candidate despite Berlusconi being, in theory at least, the more 'business friendly' candidate. They rightly argued that he was mostly just friendly to his own businesses.
I seem to recall they were rather taken with the unelected technocrat Mario Monti, as prime minister.
I seem to recall they were rather taken with the unelected technocrat Mario Monti, as prime minister.
> I seem to recall they were rather taken with the unelected technocrat Mario Monti, as prime minister.
Yes, he - in theory - was in tune with their values. He did manage to accomplish a few things like liberalizing store opening hours, and this: http://blog.therealitaly.com/2015/04/16/fixing-italy-a-littl... but didn't really accomplish as much as many had hoped.
The fact that he was unelected is part and parcel of how the system works in Italy, as the prime minister is not directly elected. For that matter, Matteo Renzi wasn't either.
Yes, he - in theory - was in tune with their values. He did manage to accomplish a few things like liberalizing store opening hours, and this: http://blog.therealitaly.com/2015/04/16/fixing-italy-a-littl... but didn't really accomplish as much as many had hoped.
The fact that he was unelected is part and parcel of how the system works in Italy, as the prime minister is not directly elected. For that matter, Matteo Renzi wasn't either.
> Global investors are not buying into the mania: the shares of companies listed in both Hong Kong and Shanghai are now 30% more expensive in the latter.
I'm quite confused by this statement -- if the shares on both exchanges are equivalent, this seems like an insanely good arbitrage opportunity. Are China's capital controls really tight enough to prevent Chinese nationals from finding a way to invest in the same stocks on the HK index for a 30% discount? And even if they are, I'm not clear why the Chinese government would do this -- it's like charging a 30% premium to domestic investors just for being Chinese.
I'm quite confused by this statement -- if the shares on both exchanges are equivalent, this seems like an insanely good arbitrage opportunity. Are China's capital controls really tight enough to prevent Chinese nationals from finding a way to invest in the same stocks on the HK index for a 30% discount? And even if they are, I'm not clear why the Chinese government would do this -- it's like charging a 30% premium to domestic investors just for being Chinese.
It's not capital control in this case, it's the different shares. The shares you bought in HK can not be sold in SH, and vice versa. When the company does an IPO, it will assign a percentage of the shares to SH and the other to HK. It will be fixed in that way. You'd better treat them as two separate holding companies listed on SH and HK, each owning a piece of the actual company.
Are China's capital controls really tight enough to prevent Chinese nationals from finding a way to invest in the same stocks on the HK index for a 30% discount?
The answer has to be yes - otherwise, as you say, it would be arbitraged away. It's still a bit leaky, but when it leaks it seems that investors much prefer to diversify into ownership of overseas property.
Why capital controls? Because China is more nationalist than globalist. It's also critical to keeping the industrial policy working by forcing local re-investment and preventing capital flight. Chinese growth depends on cheap money, which in turn relies on forcing people not to charge a risk premium for the percieved confiscation and rule-of-law risks in China.
The answer has to be yes - otherwise, as you say, it would be arbitraged away. It's still a bit leaky, but when it leaks it seems that investors much prefer to diversify into ownership of overseas property.
Why capital controls? Because China is more nationalist than globalist. It's also critical to keeping the industrial policy working by forcing local re-investment and preventing capital flight. Chinese growth depends on cheap money, which in turn relies on forcing people not to charge a risk premium for the percieved confiscation and rule-of-law risks in China.
China follows a nasty policy of financial repression (https://en.wikipedia.org/wiki/Financial_repression) in which the interests of "the people" is an afterthought at best.
ADDED: combine that with little to no social safety net, and the One Child policy which most? often results in 4 grandparents supported by 2 children supported by 1 grandchild (not quite so bad in the rural areas, but still inadequate, especially if a child dies), and you have the worst social planning mess outside of outright genocide (which the PRC did a lot of through the Cultural Revolution) that I'm aware of.
ADDED: combine that with little to no social safety net, and the One Child policy which most? often results in 4 grandparents supported by 2 children supported by 1 grandchild (not quite so bad in the rural areas, but still inadequate, especially if a child dies), and you have the worst social planning mess outside of outright genocide (which the PRC did a lot of through the Cultural Revolution) that I'm aware of.
This, incidentally, is why people in China riot about inflation from time to time: if you have to support yourself and several family members, you'd better have yourself a lot of savings, but it's really hard when your bank pays negative real interest rates. (And what's your alternative to the bank? Invest in the property bubble? Ha!)
Then the banks loan out this savings to the party's preferred business partners (still at negative real interest rates) which can be incredibly profitable (cheaper-than-free money will do that) and spend their wealth on a privileged few.
Some day it's all going to come crashing down (and if push comes to shove, the property rights of foreign investors will probably be pretty low on the priority list).
Then the banks loan out this savings to the party's preferred business partners (still at negative real interest rates) which can be incredibly profitable (cheaper-than-free money will do that) and spend their wealth on a privileged few.
Some day it's all going to come crashing down (and if push comes to shove, the property rights of foreign investors will probably be pretty low on the priority list).
and if push comes to shove, the property rights of foreign investors will probably be pretty low on the priority list
Then I suppose it's good they don't let us invest very much in the country!
This makes it unlike e.g. Greece, where we're told there are a number of European banks outside with dangerous exposure, although there's been plenty of time to mitigate that. So conventional contagion might not be such a problem, I myself am worried about various goods and raw materials that the PRC has a current lock on. E.g. lots of pharmaceutical precursors.
Then I suppose it's good they don't let us invest very much in the country!
This makes it unlike e.g. Greece, where we're told there are a number of European banks outside with dangerous exposure, although there's been plenty of time to mitigate that. So conventional contagion might not be such a problem, I myself am worried about various goods and raw materials that the PRC has a current lock on. E.g. lots of pharmaceutical precursors.
I feel like there's 2 sides to the story : 1st, as you mentioned, external investors would have money in the country that they couldn't get back because of the low position on the priority list.
On the other side, I feel like china investing in your business makes you own them money. And i their economy comes crashing down, what prevents them from asking for their money back, which you might not have in full, or that you need for planned investments. Is there anything I'm missing ?
Wow. I didn't know that they really lacked the social safety net. So maybe now that they are more industrialized the could have a real communist revolution and see what happens?
Yes there are complex share cases that disbar investors based on nationality.
I read a related analysis (can't recall where, sadly) which indicated that some speculators (as opposed to investors) actually preferred to speculate in Shanghai, as they expect the shares to bubble higher before they sell them on; if they speculated in HK, they'd just not make as much profit.
Obviously, there's an associated higher risk, but that's the game.
Obviously, there's an associated higher risk, but that's the game.
> Global investors are not buying into the mania
I thought non Chinese investors were not allowed to "buy in" anyways
I thought non Chinese investors were not allowed to "buy in" anyways
> Kemian Wood Industry, which used to boast of the quality of its composite floorboards, took radical steps to deal with the downturn. It switched its focus to online gaming and changed its name.
> A hotel group rebranded itself as a high-speed rail company, a fireworks maker as a peer-to-peer lender and a ceramics specialist as a clean-energy group.
I've heard of pivoting, but this goes way beyond that. Doing a complete 180 on what you're producing/selling and changing your name? That's both fascinating and scary at the same time. As a customer, how do you know whether the company you're buying from will still be around?
> A hotel group rebranded itself as a high-speed rail company, a fireworks maker as a peer-to-peer lender and a ceramics specialist as a clean-energy group.
I've heard of pivoting, but this goes way beyond that. Doing a complete 180 on what you're producing/selling and changing your name? That's both fascinating and scary at the same time. As a customer, how do you know whether the company you're buying from will still be around?
I think it's worth entertaining the possibility that these companies are not actually producing anything after their "pivot" but are just bilking investors.
It makes you wonder what the determinants of success are for a Chinese business. Would you trust cars made by Nike, if they suddenly started making them, or a airline run by the Hilton Group?
How about an airline run my a record label?
Virgin is a bit of an exception. At the beginning it merely chartered aircraft run by others; it was a branding exercise rather than managing and running aircraft.
Conglomerates like GE do anything and everything, but the companies cited in the article appears to be relatively small, e.g.from making only floorboards to online gaming is quite a shift in operational requirements.
Conglomerates like GE do anything and everything, but the companies cited in the article appears to be relatively small, e.g.from making only floorboards to online gaming is quite a shift in operational requirements.
Nokia used to make a big deal about their background in paper mills, rubber boots etc.
http://company.nokia.com/en/about-us/our-company/our-story
http://company.nokia.com/en/about-us/our-company/our-story
Nokia had a natural progression though. Rubber, rubber-coated cables and wires, analog telephone switches full of wiring, digital telephone switches full of software, mobile phones that talk to those switches! And this took about a hundred years.
or spaceships.
LG makes Shampoo
Samsung makes killer robots and tankers.
http://en.wikipedia.org/wiki/Samsung_SGR-A1
https://www.shi.samsung.co.kr/eng/Pr/shipstory0201.aspx
http://en.wikipedia.org/wiki/Samsung_SGR-A1
https://www.shi.samsung.co.kr/eng/Pr/shipstory0201.aspx
Google makes robotic pack dogs for DARPA:
http://www.theverge.com/2013/12/14/5209622/google-has-bought...
https://www.youtube.com/watch?v=M8YjvHYbZ9w
http://www.theverge.com/2013/12/14/5209622/google-has-bought...
https://www.youtube.com/watch?v=M8YjvHYbZ9w
Didn't they drop that contract?
Giant industrial conglomerates are a totally different case. We are talking about a normal, single-product/field company switching to something totally unrelated. That's totally insane.
Most of these seem to be more or less "backdoor listings". A company that wants to list (Zeus Interactive in this case) essentially "buys" a stock symbol by merging with a defunct or flagging company (Dalian Kemian). It's easier to list this way than doing an IPO.
So it's not really a "pivot" and I feel that the article is slightly misleading on this front.
E.g. for Kemian Wood see: https://zephyr.bvdinfo.com/version-2015528/FullEditorialNews...
This is quite common in Australia, I hadn't realised it was a thing in China until now.
In Australia there are fair number of zombie listings from mining / prospecting ventures that didn't pan out. Often they're wound back to basically being a P.O box. It is very, very common for tech companies to list by doing a reverse merger with a zombie.
See: http://www.afr.com/business/banking-and-finance/investment-b... for more details.
So it's not really a "pivot" and I feel that the article is slightly misleading on this front.
E.g. for Kemian Wood see: https://zephyr.bvdinfo.com/version-2015528/FullEditorialNews...
This is quite common in Australia, I hadn't realised it was a thing in China until now.
In Australia there are fair number of zombie listings from mining / prospecting ventures that didn't pan out. Often they're wound back to basically being a P.O box. It is very, very common for tech companies to list by doing a reverse merger with a zombie.
See: http://www.afr.com/business/banking-and-finance/investment-b... for more details.
This probably has more to do with the extreme pain of licensing a new business in China.
I may be completely off about this, but isn't it the term suppose to be "going concern"? I thought I had discovered a phrase I didn't know, but then I did a Google search and the only occurance is this article.
That said, if China's market goes under it may be pretty gory. :)
That said, if China's market goes under it may be pretty gory. :)
It's a pun, playing on the well known phrase "going concern". It's a bull market, and people are going to get gored when it stops (which of course is something bad a bull can do to people), which is a concern. A "going concern" is some kind of viable enterprise, so by casting it as a "goring concern" they're alluding to the fact that the stock bubble does not look like a viable enterprise, as well as getting in a reference to bull markets and giving their prognosis. Puntastic.
Play on words... Extremely "bullish" market, lofty valuations, irrational exuberance, people are going to end up gored when some of these companies (300431, 283.HK, 566.HK etc) end up in dirt and no longer qualify as "going concerns".
While we're on the subject, when you say "isn't the term suppose to be", you actually need to say "isn't the term supposed to be". I've noticed that people have started pronouncing this wrong (they now say "suppoes" rather than "suppozed") and that's spread into the written form.
Similarly, people are also replacing the correct "used to" with "use to".
Similarly, people are also replacing the correct "used to" with "use to".
"Use to" can be correct, e.g. "Didn't we use to go to the same school?" The tense of "use" should match the tense of the predicate.
I assumed it was "a growing concern". But I can't ding the submitter for copying verbatim from the article title.
The spark that started it all?
This is crazy:
> Credit Suisse estimates that 6-9% of China’s market capitalisation is funded by credit, nearly five times the average in the rich world.