Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelertoing Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

10 Signs of Speculative Mania in China

Economics / China Economy Mar 30, 2010 - 12:56 PM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleInquiring minds are reading a GMO white paper on China’s Red Flags

In the aftermath of the credit crunch, the outlook for most developed economies appears pretty bleak. Households need to deleverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It’s easy to see why they are excited. China combines size – 1.3 billion inhabitants – with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels. The People’s Republic also has a great track record.


Over the past thirty years, China’s Gross Domestic Product has increased sixteen-fold.

So what’s the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China’s current vulnerability.

Past manias and financial crises have shared many common characteristics. Below is an attempt to list ten aspects of great bubbles over the past three centuries.

1. Great investment debacles generally start out with a compelling growth story. This may be attached to some revolutionary new technology, such as railways in the nineteenth century, radio in the 1920s, or more recently the Internet. Even when the new technology is for real, prospective rates of growth may beexaggerated. Early growth spurts are commonly extrapolated into the distant future. ....

2. A blind faith in the competence of the authorities is another typical feature of a classic mania. In the 1920s, investors believed that the recently established Federal Reserve had brought an end to “boom and bust.” A similar argument was trotted out in the mid-1990s when it was widely believed that the Greenspan Fed had succeeded in taming the business cycle. The “New Paradigm” disappeared in the bear market of the new millennium. It was soon replaced with the “Great Moderation” thesis of Ben Bernanke, which suggested that high levels of mortgage debt made sense because monetary policymaking was so vastly improved. ...

3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear. As the nineteenth century economist John Mills observed: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works.” ...

4. Great booms are invariably accompanied by a surge in corruption. ...

5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward. ...

6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts. This lesson was ignored by the creators
of the European Monetary Union, which brought low rates and real estate booms to its smaller members, Spain and Ireland. ....

7. Crises generally follow a period of rampant credit growth. In the boom, liabilities are contracted that cannot subsequently be repaid. ...

8. Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. ...

9. A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become
precarious. Investments financed with borrowed money don’t generate enough income to either service or repay the loan (what Minsky called “Ponzi finance”). ...

10. Dodgy loans are generally secured against collateral, most commonly real estate. Thus, a combination of strong credit growth and rapidly rising property prices are a reliable leading indicator of very painful busts. ...

The GMO article looks at each of the above points through the eyes of China.

1. The China Dream. For centuries, foreigners have pondered how to make money from China’s vast population. Today, the China Dream is more vivid than ever. The People’s Republic has more than 1.3 billion citizens, making it the world’s most populous nation. China’s rural population is gradually moving into its cities. A further 300 million country-dwellers – that’s roughly the same size as the U.S. population – are expected to head toward towns and cities over the next decade. It is generally assumed that the Chinese economy will continue to grow by around 8% annually in the coming years. ...

2.In the Communist Party of China We Trust.

Twenty years ago, it was argued that “Japan is different” and that Tokyo’s economic policies were better than the West’s. A number of best-selling books lauded the land of the rising sun. One bore the infamous title, Japan as Number One.

Today, similar claims are made about the singularity of the Chinese economy and the superiority of Beijing’s policies. And similar expectations are entertained about China’s inexorable march to economic primacy.

3. Investment Boom. In a market-oriented economy, investment might be expected to fall during a period of uncertainty and economic turbulence. Yet in 2009, Chinese fixed asset investment climbed by 30% and contributed 90% of last year’s economic growth. Investment rose to a record 58% of GDP. These are remarkable figures. The key question is: how well was this money spent? ....

4. Corruption. All great speculative manias have been accompanied by rising levels of fraud. Only in the bust do we get to see the full extent of the “bezzle,” as the Enrons, WorldComs, and Madoffs come to light. The upturn in China’s property and infrastructure spending, however, provides a cyclical spur to malfeasance. The People’s Republic recently slipped to 79th place in Transparency International’s 2009 Corruption Perceptions Index, just below Burkina Faso. ....

5. Easy Money. Nobel laureate Friedrich Hayek differed from his great rival J.M. Keynes. While the latter argued that bubbles were the result of turbulent “animal spirits,” Hayek claimed that asset price inflation followed from excessively low interest rates. Easy money, said Hayek, fed through to monetary and credit expansion, leading to inflation, either in the general price level or in asset prices. ...

6. The Fixed Exchange Rate and Capital Inflows. The Chinese currency, the renminbi, is pegged to the U.S. dollar. An undervalued exchange rate has boosted exports and kept interest rates low. It has also encouraged massive capital inflows, mostly in the form of foreign direct investment. Capital controls have limited inflows of hot money, although speculative inflows have picked up recently. ...

7. The Credit Boom. In response to the global financial crisis and the collapse of export orders, Beijing ordered its banks to go out and lend. Last year, new bank lending increased by nearly RMB 10 trillion, a sum equivalent to 29% of GDP. These loans largely went to fund infrastructure projects, property developments, and state-owned enterprises in a number of industries. It was as if the economy had received an enormous adrenaline shot. What most analysts fail to consider is the hangover that generally follows a credit binge.

8. Moral Hazard. The major Chinese banks are controlled by the state. They have a history of poor lending decisions. ...

9. Risky Lending Practices. .... No one can gauge the robustness of the credit system since Chinese banks appear particularly reluctant to report problematic loans. Ernst & Young published a 2006 report that estimated non-performing loans (NPLs) at $900 billion. This report was subsequently withdrawn. NPLs continued to decline in 2008 even as the stock market imploded and exports crashed. Fitch has suggested Chinese banks have been rolling over, or “ever-greening,” problematic loans. Bank employees have their own reasons for burying bad loans. A loan officer who reports problem debts is liable to have his salary reduced to below that of a migrant worker. Few seem to care about the practice of concealing nonperforming loans since it’s generally assumed that so long as the economy continues growing quickly, bad credits will turn good over time.

10. The Bubble. Surging credit has revived the animal spirits of Chinese investors. The Shanghai stock market recovered sharply in the first half of last year. On a single day in late July, turnover of “A-shares” in Shanghai exceeded the combined trading of the New York, London, and Tokyo stock exchanges. Chinese IPOs accounted for nearly two-thirds of global issuance by market value in the third quarter of last year. Chinese companies accounted for seven of the ten largest IPOs in the world. New issues were often massively oversubscribed and saw huge first day “pops.”

The Field of Dreams

Three years ago, Premier Wen described China’s economy as “unstable, unbalanced, uncoordinated and unsustainable.” The Great Recession hasn’t cured these imbalances. Rather, China’s ensuing investment and credit booms exacerbated them. The real estate market displays the classic symptoms of a bubble – stretched valuations, rampant speculation, and frenzied new construction. Sooner or later, this bubble will burst.

In the past, whenever an economy has exhibited the 10 red flags listed in this paper there has been an unpleasant outcome. Forecasting the end game is no easy task since speculative bubbles can run to extremes. It’s made more difficult in this case by the fact that China is not a pure market economy. Stateowned enterprises can be called upon to prop up markets. Losses may be concealed or shuffled around like a shell game, as has happened in the past. Such measures, however, won’t cure China’s problems. They only delay the dénouement. ...

There is much more in the article worth reading. Investigative minds will want to take a closer look.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules