China’s next stock market bubble may be upon us

What goes up…
What goes up…
Image: Reuters/stringer
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There are two ways to look at the remarkable performance of the Shanghai stock market, which has climbed nearly 40% this year, and about 10% in the last week alone:

Image for article titled China’s next stock market bubble may be upon us

1. This is just the beginning of an even stronger bull market. Cao Fengqi, director of finance at Peking University, believes China’s stock markets are ready for a big leap (link in Chinese). The weak housing market may have driven money into stocks, but market reforms have made a bubble unlikely, other like-minded bulls say. One Morgan Stanley strategist even called the beginning of an “ultra-bull” market, predicting stocks could double in 18 months.

2. China is in the middle of another stock market bubble. Analysts say that bull-market enthusiasm “has become self-reinforcing.” (paywall) Just as happened in 2007, when the index climbed to nearly 6,100, the flood of money into “A-shares,” as Shanghai and Shenzhen-traded stocks are known, can’t last. The following year, many retail Chinese investors were wiped out, losing their lives savings (paywall) after the market fell 65%. “Every spike in the A share market was a bubble,” former World Bank economist Andy Xie told Bloomberg. “Why should this one be any different?”

With China’s economy showing continued signs of a slowdown, huge doubts about the quality of trillions of dollars in loans outstanding to companies, and leverage driving much of the stock-buying, it is pretty tough to side with the bulls.