An Utterly Predictable Bust

Why don't people ever learn? Every bubble ultimately pops, and few manage to emerge from the wreckage unscathed. We saw it with the dot-com boom in the late-1990s and the housing bubble in the first half of this decade. And now we are seeing a similar unraveling taking place in China. In "Bubble Trouble for Asia as the Stock Market Dream Sours," the Scotsman details a sorry saga that was so utterly predictable.

A year ago, investors like Guan Ling were ebullient. Chinese share prices had climbed over 500% in the span of two years, setting off a nationwide stock buying frenzy. When experts periodically warned about the possibility of a bubble, prices would dip temporarily then soar even higher, breaking records and inciting another mad dash to snap up equities.

"The market was going wild," says 49-year-old Guan who a few years ago closed his property company to invest in stocks full time. "Everybody was talking about how much they had earned, how much more they would invest, and which stocks had jumped 20 times, or even 30 times."

That was last year. The Shanghai composite index has plunged 45% from its high, reached last October. The first quarter of this year, which ended with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets, are depressed and angry. "These days my family quarrels a lot," says Zhang Liying, 55, a retired hotel waitress who with her husband invested all their savings in the stock market. "My husband asked me to sell; I wanted to hold for a while. Now my husband condemns me as so stupid that we lost our family's savings."

Other parts of Asia are as bad, or worse. In India, stocks have plunged 31% in Mumbai; they are off 31% in Japan and a whopping 53% in Vietnam, another booming economy. Angry investors burned an effigy of a securities regulator in Mumbai, and some wept in Ho Chi Minh City, Vietnam.

The market mayhem began after concerns grew late last year about inflation at home and an American financial crisis. Now, even though China's economy is growing at its fastest pace in over a decade, stock prices have fallen back to earth, crushing small investors on the way down.

Few experts say the stock plunge is a major threat to growth in the real economy here. But there are worries that a prolonged downturn could reverberate through China's financial markets – especially since a large number of corporations had aggressively shifted money, sometimes secretly, to play the market.

By some estimates, 15 to 20% of the profits reported last year by publicly listed companies in Shanghai that are not involved in banking or finance (which usually invest in stocks) came from stock trading.

But the big companies were following the small investor. JPMorgan estimates that 150 million people in China were invested in the Chinese stock market at the end of last year. That may still be a small slice of China's 1.3 billion people, but it is a huge new constituency, and it has led to the birth of a new source of potential popular discontent.

The government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors' anger. "Actually there are a lot of complaints, but the Chinese media can't report this," says Guan, the former property company owner.

This was not the way it was supposed to end. Many investors believed Beijing would not allow the stock market to crash before the Olympic Games come to the capital in August.

If anything serious happened before then, the government would certainly do something to prop up the market, they thought. They are still waiting.

"It's a deformed market, an unhealthy market," Guan says. "We've always had long bear markets and short bull markets."

"Look," he said, "it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500."

(Hat tip to FallStreet.com)

Comments

[roger pasa]

Why don't people ever learn? the answer to that question is NEVER...NEVER period! another very important question was asked by a very famous women in the late 1800's that question was:when does accumulation stop?the answer is WHEN THERE IS NOTHING LEFT TO ACCUMULATE! That will be soon!

[just dug]

Another good example of moral hazard, except it's individuals expecting a bailout rather than banks.

It's really sad to think of all the wealth destroyed and all that never was because of the continual repetition of every egregious mistake from the past. Bernanke talks about not repeating Japan's mistakes while reenacting the same zero interest rate policy, with the only modification being creative attempts to disguise that he's just doing the same old inflationist loss redistribution. The Japanese used the new money for the carry trade (and exported it), but even in the latest new era of economics I think you have to have savings to do that.

China may end up being the best place to put your money since they at least understand a bubble is best popped by raising reserve requirements.