The Shanghai stock market has gone up nearly eighty percent since the end of October 2014 despite evidence that China’s economy is slowing and its real estate market is deflating. CNN reports how China’s stock market looks too hot to touch.
Chinese equities are officially on fire. The Shanghai Composite has skyrocketed 78% since just before Halloween. It recently crested the 4,000 level for the first time since the financial crisis.
Yet stocks in China have achieved red-hot status just as the country’s economy is going through a cooling off period. Growth slowed to the weakest pace since 2009.
In other words, exuberance for Chinese stocks isn’t being backed up by fundamentals. Instead, the market is being carried higher by various forms of government stimulus and investor frenzy.
All of this raises the question: Is China in the midst of a bubble? And if it is, what should American investors do?
When a US stock market is about to crash it often is very volatile and many investors try to hang on to eke out a little more profit even though they know in their rational mind that staying invested is dangerous. This may well be the case in China. Our ongoing reservation about investing in Chinese markets is their lack of transparency. Couple that fact with a market on the verge of a huge correction and it is a great reason to stay away. Right now Chinese stocks are too hot to touch.
From Real Estate to Stocks
The Chinese like the Japanese are great savers. When the Communist country started to allow people to own property it set off a real estate boom. The problem is that the China high end real estate is over built as investors have picked up empty apartments and condos as long term investments. At long last the overheated Chinese real estate market is collapsing and those investors who were ahead of the curve put their money into stocks or invested in investments off shore. This has driven stocks up as real estate sags. The Wall Street Journal reports on how the Chinese government is attempting to prop up real estate companies.
Some Chinese property developers mired in debt and struggling with a deep housing slump are getting a helping hand from the Chinese government.
Evergrande Real Estate Group this month said that three major state-owned banks as well as a private lender have agreed to extend it credit lines worth 100 billion yuan ($16.1 billion). The firm’s borrowings totaled 151.8 billion yuan as of June 30, up 39% from the end of 2013.
In February, state-controlled China Orient Asset Management Corp. said it plans to buy a 50% stake in Shanghai Zendai Property Ltd. for 1.5 billion Hong Kong dollars ($193 million). The asset-management firm, which had extended loans to Zendai totaling 1.96 billion yuan, has since offered to buy the remaining shares it doesn’t already own.
Chinese real estate will fall in price and eventually be a bargain but for now investors are looking elsewhere and that is part of why Chinese stocks are too hot to touch.
What Happened to the Exports?
As investors are buying every Chinese stock in sight economists were surprised to see a substantial export slump in China. The Financial Times writes about the slump in exports and what that might mean for China’s economic growth.
China’s exports slumped 15 per cent in March against a year earlier in a sharp reversal of the past two months’ growth and raising the prospect of disappointing first-quarter economic growth.
Jitters about the slowing Chinese economy, for which Beijing has set a growth target of “about 7 per cent” this year, reverberate globally and have already helped dent commodity prices.
Chinese stocks are too hot to touch while China is having trouble selling products offshore at its usual pace. This means China needs fewer commodities which means that its suppliers will suffer and have less money to buy things from China. A Chinese economic slump will have wide ramifications. In the meantime Chinese stocks are too hot to touch which means that you should stay far away until the situation become more rational.