DEALING WITH THE BUBBLE AND STRIFE
The Chinese economy suffered slides during the global financial crisis in 2008, but this time, the stakes – and debt levels – are much higher, writes Paul Syvret
F EAR is the new fundamental at play in world markets.
After one of the most volatile weeks since the peak of the global financial crisis, uncertainty now rules.
The epicentre of this latest quake is China, which is exhibiting many of the signs of a bubble economy desperately trying to stave off the inevitable reckoning.
The rout that has seen the Chinese stockmarket fall 40 per cent from its peak this year – and accelerated in recent weeks – is not in itself the problem, but rather symptomatic of underlying structural issues that warrant a degree of fear.
Much of the Chinese market’s meteoric rise has been artificial in nature.
As China’s real estate boom started to unravel last year, the Chinese Government responded by cutting interest rates and loosening credit controls. With property looking like a bad bet in a country awash with “ghost cities” and unfinished apartment towers, money started to flow into shares.
This was encouraged by Chinese authorities who used state-run media to promote opportunities for companies to access fresh capital and spruik the gains to be had from investing in shares.
In this context, they had a particular eye on the country’s major banks – already dangerously exposed to property and local government bodies who had borrowed heavily to invest in grandiose infrastructure projects – which needed to access new capital to bolster their balance sheets.
In China’s strange hybrid of a centrally controlled economy that is ostensibly moving towards a freer market model, this basically replaces one bubble with another.
Once the cheap money floodgates were opened, the speculators went to town.
On secondary markets such as the ChiNext market in Shenzhen, which is like the United States’ high tech NASDAQ index, some companies with little track record were bid up to price-toearnings multiples of close to 300 times – the sort of heady stuff reminiscent of the Dotcom bubble in the US in the late 1990s.
A s the market continued to roar, Chinese authorities became edgy and in May started to tighten the rules on margin lending – the debt funded purchase of stocks that Chinese investors have embraced with about US$500 billion worth of leveraged
Once the credit tap was squeezed, the bubble started to deflate and regulators got nervous again.
While less than 10 per cent of Chinese citizens invest directly in the market and stocks in China represent a far smaller proportion of GDP than that of western economies such as the US or Australia, the potential for financial and social unrest that comes with a major market correction is real.
And bear in mind here re that in the 12 months to July some 40 million new trading accounts were opened, many using borrowed money.
At a human level the stories are starting to emerge.
CNBC – six weeks after interviewing a Chinese farmer who proclaimed proudly that “it’s a lot easier making money from stocks than farm work” – recently revisited the story, and discovered a whole new paradigm.
According to another