Don’t Quote Me (On the Bubble)

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Andy Xie, a leading economist in China, has an excellent article in the latest Caijing Magazine. It is all about putting the stock market bubble in context, and putting those who are bragging about their stock-picking performance in their rightful place – reminding them that they are not stellar stock-pickers with long-term vision like Warren Buffet. He writes:

    “Many who think they are copying Buffet are actually speculating. Characteristics of the Chinese stock market still don’t reward the Buffet model. I think the Chinese stock market is a bubble market — full-blown financial mania. It would be the last place for Buffet.”

He goes on to recall the Hong Kong property bubble in the late 1990s (“In a typhoon, pigs fly”), and the pain that it caused, before expanding on the current bubble’s prospects.

    “The Chinese stock market entered bubble territory when the Shanghai A-share index passed 2,500. A bubble has a natural life, driven by human psychology…Chinese investors usually associate a bubble burst with government intervention and think that a bubble could continue forever without government intervention. This is not true. A bubble can collapse under its own weight. The U.S. stock market did so in 1929 and Japan’s in 1989. Hong Kong’s market collapsed due to an external disturbance. The tech bubble in 2000 collapsed when overcapacity destroyed corporate earnings. You never know how a bubble will burst. But it always does.”

Watch this space… if (and when) the bubble does burst, not only will a lot of people lose a lot of money, but a lot of companies will see an impact. As Andrew Hupert at Diligence China pointed out back in January, international businesses could feel an indirect impact from any bust in the market as the owners of SMEs may be using stock profits to shore up the business, and could come under pressure after a fall, while negotiations with new employees could also be impacted if their net worth has just seen a sudden, downward correction.

It is nice that someone can always see the silver lining on the storm cloud!

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4 Responses to “Don’t Quote Me (On the Bubble)”

  1. Andrew-Shanghai Says:

    Yes, well, I’m not looking forward to the market correction, but I’m a firm believer in GRAVITY. Things always fall back toward their normal orbit. I was in Taiwan when the Taiex was performing just like today’s A-Share market, and heard many of the same justifications and rationales. If you know a storm is coming, you have two choices — try to convince yourself that the blue skies will continue forever, or patch your own roof and get into the umbrella business.

  2. Jeremy Gordon Says:

    I noted with interest that my very lovely Chinese teacher in Shanghai sold all her shares last week…a sign of things to come?

  3. China’s stocks fall as Greenspan comments on bubble | China Briefing Blog Says:

    […] Shanghai and Shenzhen began to fall, well, at least it seemed like that. Many having been voicing their concern of the stock bubble and the downturn could be mere coinci […]

  4. Archive » …Bust?| China Business Blog Says:

    […] defy gravity (here and here), and there has been a growing consensus that the market is an over-valued bubble. However, the sheer number of investors (there are now over 100 million indiv […]

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