After blogging for over a year and touching on the oft-mentioned theme of the Chinese stock market meltdown, I am now confronted with a meltdown of global proportions.
Ironically, the Chinese economy might be in a better position than many to withstand this global crisis. I think at this point, the Chinese economy will no doubt feel the effects of this crisis roiling in the US and Europe. The effects will be indirect - lower demand for Chinese imports and less overseas investments.
The banks in China was not plagued with the same problems with their counterparts in the west ironically because the economy here in China is not as mature. Credit is not used as much as America as a tool to finance investments and purchases. Therefore, the impact on China will be coming externally rather than internal. The key for China and its large eastern cities will be their own credit markets and the real estate market. After the stock market meltdown, China can ill-afford to have a real estate meltdown. The real estate market have shown signs of weakness, and are indeed very much over priced. If this part of the economy starts to deteriorate, things could become quite ugly as well
Of course, it still remains to be seen if things will get as bad here in China as elsewhere in the world. One thing is for sure, Chinese economy is not as leveraged as Americas, and that just might be enough to keep things from getting really ugly.
Showing posts with label business. Show all posts
Showing posts with label business. Show all posts
Saturday, October 11, 2008
Saturday, September 20, 2008
Turmoil on Wall Street
The past two weeks have been incredibly eventful in the financial world. Several of the biggest names on Wall Street have either gone out of business, forced to be sold, or saved by the US Government.
This is very relevant to me since I use to work at one of the two remaining independent investment banks still embroiled in the turmoil. I have spoken to some of my former co-workers and can sense the nervousness about their uncertain future. It is likely that they will have to be forced into a merger considering the adverse market condition for an independent investment bank to operate under. This will most likely result in layoffs as there will be redundancies in any merger.
As this financial seismic event was taking place on Wall Street, people in China also felt it as their stock market dove in concert with the global markets. Its actually pretty amazing how many people in China actually know the names of Lehman Brothers, Morgan Stanley and Goldman Sachs. I don't think most Chinese actually know what these firms do, but then again it seems like the firms themselves don't seem to either.
This is very relevant to me since I use to work at one of the two remaining independent investment banks still embroiled in the turmoil. I have spoken to some of my former co-workers and can sense the nervousness about their uncertain future. It is likely that they will have to be forced into a merger considering the adverse market condition for an independent investment bank to operate under. This will most likely result in layoffs as there will be redundancies in any merger.
As this financial seismic event was taking place on Wall Street, people in China also felt it as their stock market dove in concert with the global markets. Its actually pretty amazing how many people in China actually know the names of Lehman Brothers, Morgan Stanley and Goldman Sachs. I don't think most Chinese actually know what these firms do, but then again it seems like the firms themselves don't seem to either.
Friday, September 5, 2008
The bubble that was
This recurring theme continues to bear fruit. Who can resist talking about money? The Shanghai Stock Exchange Composite sits today 9/5/08 at 2202, a 64% drop from its high of 6124 on 10/16/07. This is also a 22% drop from my last blog entry (6/11/08 - 2856) about this historic collapse.
I no longer consider this a bubble anymore. By conventional measures, this index is probably close to its fair value (but still a bit on the high side). Of course this does not mean that the decline will halt because during a panic, stock market values tend to overshoot fair value to settle at below value. This could mean another several hundred points of decline in store for this market. To their credit, the Chinese government for the most part have not made any dramatic policy changes to placate the investors who have lost a considerable amount of their investment. Accountability should rest on the investors in order for capital markets to reach maturity.
The retail investors have really taken it on the chin. A cross section of society have been affected by this, and that is a pattern when a market is in a bubble. It can only get to that point when all kinds of people start to invest in it. Where I work there are people who are mail room clerks, landscapers and chauffeurs all investing in the stock market. Our maid have also dabble in it. This correction was necessary and imperative in order for this stock market to mature.
The latest development in the real estate market in China is that it is following the stock market in a correction. Sales volume have really slowed to a trickle for the past year and the prices are dropping throughout the country. We will see where all of this end soon enough.
I no longer consider this a bubble anymore. By conventional measures, this index is probably close to its fair value (but still a bit on the high side). Of course this does not mean that the decline will halt because during a panic, stock market values tend to overshoot fair value to settle at below value. This could mean another several hundred points of decline in store for this market. To their credit, the Chinese government for the most part have not made any dramatic policy changes to placate the investors who have lost a considerable amount of their investment. Accountability should rest on the investors in order for capital markets to reach maturity.
The retail investors have really taken it on the chin. A cross section of society have been affected by this, and that is a pattern when a market is in a bubble. It can only get to that point when all kinds of people start to invest in it. Where I work there are people who are mail room clerks, landscapers and chauffeurs all investing in the stock market. Our maid have also dabble in it. This correction was necessary and imperative in order for this stock market to mature.
The latest development in the real estate market in China is that it is following the stock market in a correction. Sales volume have really slowed to a trickle for the past year and the prices are dropping throughout the country. We will see where all of this end soon enough.
Friday, June 13, 2008
The incredible shrinking bubble
Well, if you have been reading my blog since the beginning you know this has been a recurring theme - the bubble that is the Shanghai Stock Market. The latest is the bubble has shrunk to a level where things are starting to look reasonable. Seems like this market is destined to bottom out sometime around the Olympics. The Shanghai index has taken an eye-popping 53% haircut since last October (6124 to 2869). Reminds you of the NASDAQ bubble doesn't it?
I think there is still some more to go. I think a fair value for this market is around 2000 but in a situation like this the correction will surely overshoot. So I would not be surprise if it hits 1500. This market stood at 1161 on 1/1/06 so if this market falls to 1500 it would still be a return of 30% over a period of around 3 years, still not too bad by traditional measures.
Surprisingly, most of the regular small investors taken all of this in stride. It seems like they view stock market investing as gambling anyway so they can accept the fact that they lost money. That is a bad state of affairs when people have so little faith in the stock market.
I think there is still some more to go. I think a fair value for this market is around 2000 but in a situation like this the correction will surely overshoot. So I would not be surprise if it hits 1500. This market stood at 1161 on 1/1/06 so if this market falls to 1500 it would still be a return of 30% over a period of around 3 years, still not too bad by traditional measures.
Surprisingly, most of the regular small investors taken all of this in stride. It seems like they view stock market investing as gambling anyway so they can accept the fact that they lost money. That is a bad state of affairs when people have so little faith in the stock market.
Thursday, March 13, 2008
air out of the bubble
It appears that bubbles of all sorts around the world are in the process of deflating. China's stock market, probably the biggest bubble of all is doing its part. On 10/16/07, the Shanghai Index stood at 6092 and it represented its peak. For perspective, the index stood at 1161 on 1/1/06. Today, the index finished the day at 3971, a 35% correction so far. Even after this correction the PE of the index is still around 40 which indicates there is still ways to go. The scarier proposition is that if an Enron can occur in the US with its matured capital markets, imagine the veracity of the data in an emerging, unregulated market like China; the real PE could be much higher.
Another bubble - real estate seems to be taking a breather as well. Sales volume in Shanghai on residential real estate have been declining for the past 4 months and the prices have become stagnant. As we see in the US real estate market, it takes a period of declining demand for the prices to eventually follow. We may be at the precipice of the deflation of the real estate bubble here in Shanghai.
The amount of investment that has been poured into China in recent years have really created a possibility that the entire Chinese economy is a bubble. Time will tell whether this is true.
The Chinese people here have all been saying that they believe that the economy will be strong leading up to the Olympics and they are cautious about the post-Olympic days. It looks like this might become a self-fulfilling prophecy.
Another bubble - real estate seems to be taking a breather as well. Sales volume in Shanghai on residential real estate have been declining for the past 4 months and the prices have become stagnant. As we see in the US real estate market, it takes a period of declining demand for the prices to eventually follow. We may be at the precipice of the deflation of the real estate bubble here in Shanghai.
The amount of investment that has been poured into China in recent years have really created a possibility that the entire Chinese economy is a bubble. Time will tell whether this is true.
The Chinese people here have all been saying that they believe that the economy will be strong leading up to the Olympics and they are cautious about the post-Olympic days. It looks like this might become a self-fulfilling prophecy.
Monday, January 21, 2008
Bubble
Anybody who has been reading the business sections of their favorite publication will undoubtedly know that the US economy has faltered and is in danger of falling into a recession. The reason is pretty basic; there has been a housing bubble which has led to an excess of liquidity in the economy. This excess liquidity has spurred consumption and investment which has overheated the economy. This impending recession is just a normal process where things return to where it should be. The stock market has reacted and I believe that things may turn painful for a year or two but it should be nothing that we cannot recover from.
The interesting part from my perspective is what will happen here in China. The Chinese investors have felt that their economy has been fairly insulated from the rest of the worlds’ ills. This has led to the unabated climb of their stock and property market. As these markets get hotter and hotter, less sophisticated investors (or should I say speculators) enter the market and raise the temperature further. This process has fed on itself for quite a few years now in China. It started in the property markets about 5 years ago and the stock markets 2 years ago. The prices of these assets have climbed to levels that cannot be justified by conventional measures. While bad news have come out of US banks and investment firms about the subprime losses, the Chinese stock markets have pretty much ignored it. Well, yesterday it has been reported that the Bank of China, the second largest bank in China and by some measures one of the largest in the world may have up to 2 billion in US subprime mortgage losses when they announce earnings. This could represent the first evidence that the Chinese economy is not so insulated from the world economy. I think this could be a big blow to the psychology of the market and lead to a re-evaluation by investors about just how safe their stock market really is. Just like the feeding frenzy that led to the bubble, the same mentality could lead to the panic that results in the crash of two very important markets in the Chinese economy.
The interesting factor in this scenario is the belief held by many investors in China that the Chinese government will somehow make sure that the stock and property markets will be performing well leading up to their coming out party that is this years Summer Olympics in Beijing. This kind of common belief could lead to the self fulfilling prophecy of a large withdrawal of investments out of these markets sometime around the Olympics. How this interplays with the possible global recession will be very interesting.
My interactions with the local Chinese tells me that many people are currently participating in this stock market bubble - mostly unsophisticated investors who think they know how to invest. It is basically the same kind of stories that I heard and saw during the days of the NASDAQ bubble back in the late 90s and early 00s. Its amazing to realize even with such differing cultures we are all the same. What this also tells me is that when this market crashes there will be lots of pain among the people and they really have nobody to blame but themselves.
Of course this is just speculation on my part, but having been through the NASDAQ bubble and the recent housing bubble in the US, I think it would be pretty safe to say that the similar outcome will take place here in China.
The interesting part from my perspective is what will happen here in China. The Chinese investors have felt that their economy has been fairly insulated from the rest of the worlds’ ills. This has led to the unabated climb of their stock and property market. As these markets get hotter and hotter, less sophisticated investors (or should I say speculators) enter the market and raise the temperature further. This process has fed on itself for quite a few years now in China. It started in the property markets about 5 years ago and the stock markets 2 years ago. The prices of these assets have climbed to levels that cannot be justified by conventional measures. While bad news have come out of US banks and investment firms about the subprime losses, the Chinese stock markets have pretty much ignored it. Well, yesterday it has been reported that the Bank of China, the second largest bank in China and by some measures one of the largest in the world may have up to 2 billion in US subprime mortgage losses when they announce earnings. This could represent the first evidence that the Chinese economy is not so insulated from the world economy. I think this could be a big blow to the psychology of the market and lead to a re-evaluation by investors about just how safe their stock market really is. Just like the feeding frenzy that led to the bubble, the same mentality could lead to the panic that results in the crash of two very important markets in the Chinese economy.
The interesting factor in this scenario is the belief held by many investors in China that the Chinese government will somehow make sure that the stock and property markets will be performing well leading up to their coming out party that is this years Summer Olympics in Beijing. This kind of common belief could lead to the self fulfilling prophecy of a large withdrawal of investments out of these markets sometime around the Olympics. How this interplays with the possible global recession will be very interesting.
My interactions with the local Chinese tells me that many people are currently participating in this stock market bubble - mostly unsophisticated investors who think they know how to invest. It is basically the same kind of stories that I heard and saw during the days of the NASDAQ bubble back in the late 90s and early 00s. Its amazing to realize even with such differing cultures we are all the same. What this also tells me is that when this market crashes there will be lots of pain among the people and they really have nobody to blame but themselves.
Of course this is just speculation on my part, but having been through the NASDAQ bubble and the recent housing bubble in the US, I think it would be pretty safe to say that the similar outcome will take place here in China.
Wednesday, October 10, 2007
Look out below!!
Just to provide an update on an earier post. I mentioned in a post on 8/22/07 about the rampaging stock market over here in Shanghai. The Shanghai index on that day closed at 4980. Well in less than a month the index now stands at 5771. This mania has even spilled into the Hong Kong stock market since the Chinese government announced that they will start to allow Chinese citizens to invest in the Hong Kong stock market. Since that announcement on 8/20/07 the Hang Sang index has risen from around 20,387.13 to 28,569.33 where it stands today, a 40% rise. As this bubble continues to roil seemingly unabated the inevitable crash will be more and more painful.
Quotes for the Shanghai index:
http://finance.yahoo.com/q/hp?s=000001.SS
Quotes for the Hang Sang index:
http://finance.yahoo.com/q/hp?s=%5EHSI
Monday, September 24, 2007
Steroids from China
Well, if China-US trade relations can't get any worse it gets worse. I have a feeling things are going to get a lot worse before things stabilize.
In the past year it has been toys, food, cribs, toothpaste and now steroids and HGH.
Performance enhancing drugs has been part of the world sports scene for a long time now but it has received its brightest spotlight this year with the breaking of the most legendary and fabled record in American sports. Barry Bonds' anatomic makeover reputedly began about 7 years ago. At that time Bonds was considered a sure hall of famer, but nobody thought he could challenge Hank Aaron's all time home run record of 755. In the past 7 years Bonds has had some of the most productive home run seasons even though he has been in his late 30s to early 40s. Last month Bonds broke Aaron's record and the reception was muted from baseball fans everywhere.
With all of this going on this year in the realm of world trade and sports, now we have the news of a drug bust of unprecedented size where it has been discovered that China supplies about 75% of the world trade in performance enhancing drugs.
Seems like the secret behind the China's economic miracle in the past 20 year where GDP growth has been averaging around double digits annually is being revealed. The Chinese have been engaging in not just legitimate industries but the illegitimate ones as well. It seems there is no industry where the Chinese would find immoral to get involved with. The problem is that they are so damn good at it just highlights everything that much more.
Sometimes as an ethnic Chinese, I can't help but to feel embarrassed about some of the shady business that the Chinese are involved
In the past year it has been toys, food, cribs, toothpaste and now steroids and HGH.
Performance enhancing drugs has been part of the world sports scene for a long time now but it has received its brightest spotlight this year with the breaking of the most legendary and fabled record in American sports. Barry Bonds' anatomic makeover reputedly began about 7 years ago. At that time Bonds was considered a sure hall of famer, but nobody thought he could challenge Hank Aaron's all time home run record of 755. In the past 7 years Bonds has had some of the most productive home run seasons even though he has been in his late 30s to early 40s. Last month Bonds broke Aaron's record and the reception was muted from baseball fans everywhere.
With all of this going on this year in the realm of world trade and sports, now we have the news of a drug bust of unprecedented size where it has been discovered that China supplies about 75% of the world trade in performance enhancing drugs.
Seems like the secret behind the China's economic miracle in the past 20 year where GDP growth has been averaging around double digits annually is being revealed. The Chinese have been engaging in not just legitimate industries but the illegitimate ones as well. It seems there is no industry where the Chinese would find immoral to get involved with. The problem is that they are so damn good at it just highlights everything that much more.
Sometimes as an ethnic Chinese, I can't help but to feel embarrassed about some of the shady business that the Chinese are involved
Wednesday, August 22, 2007
Greed
What better way to describe greed than looking at the psychology of the stock market? Here in Shanghai, the Shanghai Composite Index has risen to record highs day after day. On 1/1/06 this index stood at 1161 and in just 20 months the index is currently at 4980. This a staggering 328% gain in 20 months!! If you want to take a look at the data here it is:
http://finance.yahoo.com/q/hp?s=000001.SS
It seems like everybody, their parents and their grandparents are in the stock market. Everybody is talking about the stock market, people are quitting their jobs to day trade, and brokerages are popping up everywhere. At current levels the Shanghai Composite is trading at 55 times last year's earning as an aggregate. Does this sound familiar? I feel like I have traveled back in time and were back in the late 90's again when the NASDAQ rose to similar heights only to crash back to reality.
The problem with the bubble in China is that it has risen even faster than the NASDAQ bubble and it probably has more room to go up. Currently, citizens of China cannot invest abroad. Their only options are to put their money in the bank, real estate or domestic stocks. They cannot go abroad in search of better investments. On the flip side, foreigners cannot invest in the Chinese stock market either. This is creating a situation where in the short term, there will probably be a continuing rise in the Shanghai stock market. But when it drops, look out. The PE's might be in triple digits before that happens.
What drives all of this? Greed of course. Everybody knows that there are normal ways that things operate, but when greed takes over rational goes down the toilet. People are rationalizing that China's booming economy will sustain these prices and because there is so much saving in China that it needs to find a place go. Well we heard some of same arguments to justify the prices of the NASDAQ and where did that lead us?
I am not smart enough to say what the catalyst will be that will burst this bubble, all I know that it will happen in the near to intermediate future. And then greed will turn into fear and panic.
http://finance.yahoo.com/q/hp?s=000001.SS
It seems like everybody, their parents and their grandparents are in the stock market. Everybody is talking about the stock market, people are quitting their jobs to day trade, and brokerages are popping up everywhere. At current levels the Shanghai Composite is trading at 55 times last year's earning as an aggregate. Does this sound familiar? I feel like I have traveled back in time and were back in the late 90's again when the NASDAQ rose to similar heights only to crash back to reality.
The problem with the bubble in China is that it has risen even faster than the NASDAQ bubble and it probably has more room to go up. Currently, citizens of China cannot invest abroad. Their only options are to put their money in the bank, real estate or domestic stocks. They cannot go abroad in search of better investments. On the flip side, foreigners cannot invest in the Chinese stock market either. This is creating a situation where in the short term, there will probably be a continuing rise in the Shanghai stock market. But when it drops, look out. The PE's might be in triple digits before that happens.
What drives all of this? Greed of course. Everybody knows that there are normal ways that things operate, but when greed takes over rational goes down the toilet. People are rationalizing that China's booming economy will sustain these prices and because there is so much saving in China that it needs to find a place go. Well we heard some of same arguments to justify the prices of the NASDAQ and where did that lead us?
I am not smart enough to say what the catalyst will be that will burst this bubble, all I know that it will happen in the near to intermediate future. And then greed will turn into fear and panic.
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