China Markets

In recent years foreign equity markets have trounced US equity markets. While the US equity markets have stayed effectively flat since 2000, many foreign markets, such as China, scored robust gains.

To many people, myself included, any time stocks rise at this rate without “fundamental” positive changes to the environment, it smells of a bubble. Remember prior to 2000 when the dot-com stocks were going to remain at a “permanently high level”, or that the economic cycle had been tamed? These thoughts were shattered when the NASDAQ swooned 78% from peak to trough during its brutal fall.

I run some individual stocks for my nieces and nephews at this site and let them select from a list of stocks; in recent years there has been a strong emphasis on these well performing overseas issues. One stock that had a meteoric rise was China Mobile – the largest wireless firm in China (and the world) – whose stock went from under $40 / share to over $100 / share in about a year – remember this stock had an enormous market capitalization to begin with and anytime a large company has this type of stock performance it is extremely abnormal. We took our winnings and left; the stock has subsequently dropped significantly.

This chart from the WSJ article “China Stocks, Once Frothy, Fall by Half in Six Months” shows clearly the runup in the China index from 2006 (near 1000) to almost 6000 in late 2007, down to near 3000 today (April 2008).

It is a sign of progress in my mind that China isn’t intervening to “fix” the situation; while these losses must be painful for many Chinese citizens (many individual investors probably piled in and invested near the peak so they didn’t get the gains on the way up but are getting hit on the way down) the government seems to realize that there aren’t any simple fixes other than letting the market work itself out.

Bubbles are bubbles, where-ever they reside. We had the NASDAQ bubble, and now we are about to go through the worst phases of the real estate bubble. As someone who has been through a couple of these, my advice is to keep your wits about you and realize that they all come to an end at some point; so take your winnings and limit your exposure even if you end up leaving some $ on the table.

Cross Posted at LITGM

2 thoughts on “China Markets”

  1. Countries which are new to stockmarkets are likely to have very wild markets. When things get really out of hand,reality pays a visit and the lesson is taken to heart. Gains in the broad market become very prosaic.

  2. China changed their tax rules (reduced the transaction tax) and also made some large types of sales go through a “block” system… resulting in about a 10% gain for the market. So I guess they aren’t above trying to prop up the market a bit, although reducing the transaction tax seems to make sense (I think they put that in the first place to try to put some brakes on the soaring market, and now they are taking it out to try to help the market).

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