Wednesday, July 8, 2015

China stock crash: index up only 72% in the past year

Things are a little crazy in China these days. As the chart above shows, stocks have crashed, falling by almost ⅓ in less than a month. That's one heck of a bear market. But stocks are still up 72% in the past year, and that's one heck of a bull market. On balance, the market value of Chinese stocks today is almost $3 trillion more than it was a year ago, and that's nothing to sneeze at. Meanwhile there has been a frenzy of trading, both as stocks rose and as they fell. 

This looks to me like an immature, lemming-style market (at one point it had risen over 150% from its year-ago lows) with inexperienced investors piling in as stocks rose to dizzying heights, and then selling in panic as prices started to return to more reasonable levels. And it hasn't helped that the government has been actively meddling, trying to keep prices from falling by pulling out all the stops—lowering reserve requirements, halting trading, banning short sales, suspending IPOs, relaxing lending standards, buying stocks, to name just a few. Instead of letting the market find its equilibrium—and educating investors in the process—the government is likely making the mistake of trying to keep stocks overvalued. Even if stocks fell another 20% (and I wouldn't be surprised if they did), they would still be up over 40% in the past year, and that would count as a great year by any measure.

It's all very unfortunate, and it's making people all over the world very nervous.

My recommendation: instead of worrying that the collapse of stock prices is going to trigger a collapse of the Chinese economy, I'd be thinking that what was a crazy-overvalued, bubble market just a few months ago is now coming back down to earth. China is not collapsing, it's learning how to deal with prosperity. 

I note that the Chinese yuan has been relatively stable for the past few years, and the central bank's foreign exchange reserves are massive and relatively stable as well. These are powerhouse numbers.

On an inflation-adjusted basis, and relative to a large basket of other currencies, the yuan has almost doubled in value since 1994. In dollar terms, the market value of Chinese stocks has skyrocketed from $330 billion in 2005 to just over $6 trillion today. The works out to annualized gains of over 30% for 10 years running, and that is simply spectacular. You can't ask for much more than that.


Joseph Constable said...


The S&P closed at about 2050 today. Back Nov 18 it made a new all time high of about 2050. So we have gone nowhere for 7 1/2 months. From 2050 the market went up to its highest point 4% higher than today and 7 1/7 months ago. The lowest it got after the new high of 11/18/14 was about 4% lower which of course is 4% lower than today. Should the S&P go back down to 1973, that lowest point, it would be an 8% correction and we still would have gone a long time without a 10% correction.

William said...

Interesting that over several decades, the seven month period from October 1st to April 30th has been the most favorable during the year for the stock market with a few exceptions. Thus the old expression, "sell in May and go away".

In particular, during the third year of a Presidency, that period has averaged a 17% gain since 1932 - which I read a few times last Fall, including from famed investor Jeremy Grantham, the founder of Grantham Mayo van Otterloo (GMO), in Barrons's 18 NOV 2014.

Not this time!

Benjamin Cole said...

The China market is kind of nutty. Eugene Fama says there is no such thing as a "bubble," but I wonder when I look at the prices of gold, Andy Warhol prints, and Chinese stocks.
Last I read the PE's were in triple digits on the Shanghai...
The good news is that inflation is below target in China (as everywhere) meaning that their central bank, the People's Bank of China, has plenty of room to maneuver.

steve said...

china stocks now trade at a p/e of about 15. given their economic growth rate, china stocks are cheaper than US and maybe anywhere else.
"China is not collapsing, it's learning how to deal with prosperity." great line and perspicacious.

marcusbalbus said...

i have not checked your blog in over 18 months as we all got sick of your endless cheerleading. i see you have not changed one iota. why do you blog? its all just drivel and lame analysis which might hurt inexperienced investors. you are clearly not a real economist or investor.

steve said...

marcusbalbus, so in other words, you put yourself in the pessimist camp which hardly ever makes money and always finds a reason to be miserable. over the long run, prudent optimism wins while feckless pessimism sits on the sidelines and waits and waits...

Matthew Grech said...

marcusbalbus: I believe I speak for many when I say I don't like your style.

Thinking Hard said...

Ad hominem attacks are the last resort for an individual without the facts or policy on his side. If you disagree with the analysis then state your reasons why because open analytical based arguments make us all more knowledgeable. Maybe you should have paid attention to the optimism, as the S&P 500 is up approximately 13% over the last 18 months. There are times to be optimistic and times to be pessimistic. You were early to the negative camp and have missed out on good gains.

One of my favorite investing quotes...

"Be fearful when others are greedy and greedy when others are fearful." - Warren Buffett

I am sensing a change in general fear level, but it is still elevated relative to where it theoretically should be after a strong bull market run.

Thinking Hard said...

China has utilized a significant amount of debt expansion to fuel the growth seen in their equity markets. This is not inherently a bad thing, but China will have to float their currency at some point in the near future.

Ultimately, the policy moves we have witnessed come out of China over the past few weeks will be detrimental to overall growth. It may have short term positive effects but the long term effects will be negative. It is setting bad precedent and placing doubt in the intriguing mind of global investors. There seems to be a strong correlation between the lack of central planning and economic growth. China has shifted in recent history towards a more capitalistic economy, but these recent policy moves are taking a few steps back.

Why buy into a market if you may not be able to sell out?

randy said...

Regarding endless cheerleading... one of the most important things I've learned is that the doomsayers will eventually be right, but while waiting to be right, they lose so much in return, that even a massive point in time loss doesn't make up for the missed gains. For example, John Hussman has very persuasively argued for YEARS that his statistics (most prominently CAPE) show that continued gains cannot happen, and pending massive losses are around the corner. Well, in 10 years, here are the returns through 6/30/15.

SP500 $10000 turns into $21,193
Hussman Growth $10000 turns into $7,427

Yep, that's right. The SP500 would have to have a 65% correction now for Hussman to be vindicated. This blog may gloss over what some see as negatives, but the value is the consistent theme of presenting data to show that for all our problems, the economic engine continues to chug along.

steve said...

china is sort of where US was circa 1900-except of course they're only semi-capitalist. there are plenty of etf's and mf's available to own to get a piece of china's pie. all of that said, I suspect an investment in chinese stocks now will reap better rewards than same in US stocks 10 years out. gonna be bumpy though!

NormanB said...

@William: If you would have purchased 'famed' investor Jeremy Grantham's mutual fund anytime after 2001 you would have done worse the the US market.

William said...

@NormanB - I didn't know GMO had a mutual fund. None is offered through Vanguard. Below is from their website:

"GMO is a global investment management firm committed to providing sophisticated clients with superior asset management solutions and services...Our client base includes endowments, pension funds, public funds, foundations and cultural institutions.

"GMO is a private partnership....As of March 31, 2015, we managed $118 billion in client assets. Our global offices include the firm's headquarters in Boston and offices in San Francisco, London, Amsterdam, Singapore, and Sydney.

steve said...

GMO offers many funds but the minimums are in the millions.

Benjamin Cole said...

No matter how much you pay a money manager, their performance regresses to the mean over time.

The investment industry--even brand-names--is often unscrupulous and obfuscatory in the way it extracts money from investors, as I know in the cases of two elderly women in my extended family. Fees, and wrap-around accounts, and indecipherable statements, etc.

If you have family members, advise them of the benefits of ETFs, or simple Vanguard-type mutual funds. You can put Grandma into a couple or three broad-based ETFs---bonds, stocks, perhaps real estate or international--and go fishing, knowing you will save your relatives tens of thousands of dollars over time.

In the last 30 years a certain elderly woman in my extended family unloaded $55,000 in often-hidden fees to mainline Wall Street firms---and, of course, the performance of her "portfolio" was average. Only extended and exasperating conversations (blood relatives are the worst) corrected the situation.

Wall Street thrives in part by extracting money from the gullible. Sad story, and I wish it were not true.

Hans said...

marcusbalbus, I believe Mr Grannis has been on both sides
of the fence..

I, too, am a bear, however, we must be willing to keep an
open mind or we will be lost in the forest.

I personally think that the best days are behind Red China;
unless there is another political revolution.

You can not hide behind currency reserves forever..

Benjamin Cole said...

SHCOMP rally means index up nearly 100% YOY