
China’s stock market bubble: A goring concern - dons
http://www.economist.com/news/finance-and-economics/21652337-economic-dangers-chinas-manic-bull-market-goring-concern
======
smaili
> Kemian Wood Industry, which used to boast of the quality of its composite
> floorboards, took radical steps to deal with the downturn. It switched its
> focus to online gaming and changed its name.

> A hotel group rebranded itself as a high-speed rail company, a fireworks
> maker as a peer-to-peer lender and a ceramics specialist as a clean-energy
> group.

I've heard of pivoting, but this goes way beyond that. Doing a complete 180 on
what you're producing/selling and changing your name? That's both fascinating
and scary at the same time. As a customer, how do you know whether the company
you're buying from will still be around?

~~~
pcrh
It makes you wonder what the determinants of success are for a Chinese
business. Would you trust cars made by Nike, if they suddenly started making
them, or a airline run by the Hilton Group?

~~~
ngd
How about an airline run my a record label?

~~~
pcrh
Virgin is a bit of an exception. At the beginning it merely chartered aircraft
run by others; it was a branding exercise rather than managing and running
aircraft.

Conglomerates like GE do anything and everything, but the companies cited in
the article appears to be relatively small, e.g.from making only floorboards
to online gaming is quite a shift in operational requirements.

~~~
ZeroGravitas
Nokia used to make a big deal about their background in paper mills, rubber
boots etc.

[http://company.nokia.com/en/about-us/our-company/our-
story](http://company.nokia.com/en/about-us/our-company/our-story)

~~~
jpatokal
Nokia had a natural progression though. Rubber, rubber-coated cables and
wires, analog telephone switches full of wiring, digital telephone switches
full of software, mobile phones that talk to those switches! And this took
about a hundred years.

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kenny-log_ins
I find myself noticing that a lot of the solutions that The Economist proposes
are very similar - opening markets, decreasing regulation - make everything
more "liberal". They always make compelling arguments for their suggestions
but I also find myself wondering whether they ever argue for any alternative

~~~
mrec
The Economist has always been "The answer is free markets! What was the
question?".

I always find it a reassuring read, in the sense that well-written, well-
researched, persuasive articles that I disagree with are a sign that I haven't
been completely engulfed by my own little information bubble, but take it with
a pinch of salt.

~~~
dublinclontarf
Actually having lived in China for a significant period of time I can say that
the answer is to remove capital controls on Chinese citizens and allow them to
invest anywhere else.

This will deflate the Chinese market bubble(and property bubble) almost
immediately, you'll see this happen however when pigs are flying to the moon.

~~~
pjc50
The answer to what question? The policy has to be to defer the bubble collapse
as much as possible in hope of the mythical "soft landing". Far more than
western countries they depend on continuous economic growth as the tradeoff
for lack of political freedom.

~~~
tim333
Deferring bubble collapses doesn't work so good as they just pop later and
bigger.

~~~
spacehunt
Problem for the next Party leader.

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kcorbitt
> Global investors are not buying into the mania: the shares of companies
> listed in both Hong Kong and Shanghai are now 30% more expensive in the
> latter.

I'm quite confused by this statement -- if the shares on both exchanges are
equivalent, this seems like an insanely good arbitrage opportunity. Are
China's capital controls really tight enough to prevent Chinese nationals from
finding a way to invest in the same stocks on the HK index for a 30% discount?
And even if they are, I'm not clear _why_ the Chinese government would do this
-- it's like charging a 30% premium to domestic investors just for being
Chinese.

~~~
pjc50
_Are China 's capital controls really tight enough to prevent Chinese
nationals from finding a way to invest in the same stocks on the HK index for
a 30% discount?_

The answer has to be yes - otherwise, as you say, it would be arbitraged away.
It's still a bit leaky, but when it leaks it seems that investors much prefer
to diversify into ownership of overseas property.

Why capital controls? Because China is more nationalist than globalist. It's
also critical to keeping the industrial policy working by forcing local re-
investment and preventing capital flight. Chinese growth depends on cheap
money, which in turn relies on forcing people not to charge a risk premium for
the percieved confiscation and rule-of-law risks in China.

~~~
hga
China follows a nasty policy of financial repression
([https://en.wikipedia.org/wiki/Financial_repression](https://en.wikipedia.org/wiki/Financial_repression))
in which the interests of "the people" is an afterthought at best.

ADDED: combine that with little to no social safety net, and the One Child
policy which most? often results in 4 grandparents supported by 2 children
supported by 1 grandchild (not quite so bad in the rural areas, but still
inadequate, especially if a child dies), and you have the worst social
planning mess outside of outright genocide (which the PRC did a lot of through
the Cultural Revolution) that I'm aware of.

~~~
fennecfoxen
This, incidentally, is why people in China riot about inflation from time to
time: if you have to support yourself and several family members, you'd better
have yourself a lot of savings, but it's _really hard_ when your bank pays
negative real interest rates. (And what's your alternative to the bank? Invest
in the property bubble? Ha!)

Then the banks loan out this savings to the party's preferred business
partners (still at negative real interest rates) which can be incredibly
profitable (cheaper-than-free money will do that) and spend their wealth on a
privileged few.

Some day it's all going to come crashing down (and if push comes to shove, the
property rights of foreign investors will probably be pretty low on the
priority list).

~~~
hga
_and if push comes to shove, the property rights of foreign investors will
probably be pretty low on the priority list_

Then I suppose it's good they don't let us invest very much in the country!

This makes it unlike e.g. Greece, where we're told there are a number of
European banks outside with dangerous exposure, although there's been plenty
of time to mitigate that. So conventional contagion might not be such a
problem, I myself am worried about various goods and raw materials that the
PRC has a current lock on. E.g. lots of pharmaceutical precursors.

~~~
molyss
I feel like there's 2 sides to the story : 1st, as you mentioned, external
investors would have money in the country that they couldn't get back because
of the low position on the priority list. On the other side, I feel like china
investing in your business makes you own them money. And i their economy comes
crashing down, what prevents them from asking for their money back, which you
might not have in full, or that you need for planned investments. Is there
anything I'm missing ?

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kordless
I may be completely off about this, but isn't it the term suppose to be "going
concern"? I thought I had discovered a phrase I didn't know, but then I did a
Google search and the only occurance is this article.

That said, if China's market goes under it may be pretty gory. :)

~~~
primo44
While we're on the subject, when you say "isn't the term suppose to be", you
actually need to say "isn't the term supposed to be". I've noticed that people
have started pronouncing this wrong (they now say "suppoes" rather than
"suppozed") and that's spread into the written form.

Similarly, people are also replacing the correct "used to" with "use to".

~~~
deciplex
"Use to" can be correct, e.g. "Didn't we use to go to the same school?" The
tense of "use" should match the tense of the predicate.

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dmix
> A shift to monetary easing and fiscal stimulus—and expectations of more to
> come—help explain why the rally began. But the longer it continues, the more
> it looks like irrational exuberance.

The spark that started it all?

This is crazy:

> Credit Suisse estimates that 6-9% of China’s market capitalisation is funded
> by credit, nearly five times the average in the rich world.

~~~
phyalow
Not to bad if you stand back and consider the entire US economy reflated only
on the bullshit of the Fed!

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amelius
If companies are worth more than what they make in revenue, stock-holders
should be penalized for illegal gambling.

~~~
mcdougle
Ok, I'll bite. Why illegal gambling? Wouldn't it be _legal_ gambling, if
anything, since it's condoned (and encouraged) by the government?

