Tuesday, October 30, 2007

Greenspan and the China Bubble

Once again, Alan Greenspan is predicting that the Chinese stock market is a bubble that has a limited life on the upside before things take an ugly turn. I have no doubt that Greenspan is correct on this count, but then again the Chinese markets could continue to go parabolic up to and beyond the Beijing Olympics, which means at least another 9 ½ months. Of course Greenspan has a mixed legacy in calling bubbles. His famous “irrational exuberance” comment of December 5, 1996 came when the NASDAQ had just crossed 1300 and the bull market still had more than three years left to run. If he’s risking his credibility here, does he have a stop loss plan?

Getting back to the primary issue, I wonder whether the Chinese government can maintain double digit economic growth for another year while keeping investment speculation under control and avoiding a stock market panic. If they believe they can accomplish this tall order, will they try to let off some steam now and have the economy coast into the Olympics or try to keep the freight train barreling down the track and tighten the screws on the economy only after the closing ceremonies are behind us?

I have no idea where how the Chinese markets will trade in the coming year, but as their influence continues to grow and a broader group of global investors seeks to participate in some of the gains, this is a story that I find myself spending more time following. In this regard, I have found two web sites in particular that have been helpful in providing news and data about various Chinese stocks: China Analyst is a site that has a wealth of tables, stock rankings and news (their recent coverage of BIDU’s earnings was extremely comprehensive); Cougar Jump is a highly informative data-oriented blog run by CH Tan.

Finally, since I’m more of a chartist than a fundamentalist, I offer the current chart of FXI, the iShares FTSE/Xinhua China 25 Index of stocks listed on the Hong Kong Stock Exchange. I’ll have more to say about this chart later. As a matter of fact, there is a temptation to make this space into an “All China, all the time!” media outlet, but for now at least, I’ll keep China as a sub-plot.


Bill Luby said...

For the record, ProShares just announced they are launching a new ETF, ticker FXP, that will target a 2x inverse of the FXI. The official launch is sometime in November...

Tim Knight said...

I'm still trying to figure out what the Olympics has to do with this. I hear this all the time.....but it doesn't make sense. Is it just a matter of national reputation?

Bill Luby said...

Hi Tim,

At first I kind of dismissed the Olympic bit, but I think the Chinese view this as their 17 days where they have the world's stage to themselves, with the attention of what will likely be the largest global TV audience ever. It is an opportunity for them to show off their country as a world superpower, just as the 1980 Moscow Summer Games was supposed to do the same for the Soviet Union.

As far as I'm concerned, the Chinese will probably approach this like Steve Jobs would approach Macworld with a similar sized audience tuning in (and/or if he only had one big stage in his lifetime.) The Chinese also probably feel as if they have a lot more to prove than Jobs does.

The new iConomy? Probably not, but they certainly want to update the world's perceptions of China for anyone who isn't peering into the future.

My take is that 9 1/2 months is an awfully long time to keep a Ferrari-paced economy running smoothly.



Unknown said...

All this assumes that the Chinese goverment has some control over stock prices. And frankly, I don't believe this one minute. As they say, every bear market has a hook! Seems to me the Olympics might well be the perfect excuse for suckers to keep buying the market all the way down next year.

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