The Chinese equity markets do not reflect reality. The government has made it so. Trading on hundreds of Chinese-listed stocks has been halted or suspended during the past few weeks, short selling (or even selling by large shareholders) has been banned, and as much as 10% of GDP has been pledged to prop up Chinese shares, and the list of government intervention goes on and on. The Chinese equity markets are “rigged,” and the government holds all the cards.
Even so, share prices won’t stop falling. There may be nothing left to stop them.
The writing has been on the wall for years that a bubble had been forming in China. As when everyone was on margin and “playing” the stock market during the roaring 1920s in America, this video reveals the similarities between 1920s America and 2015 China. Just like the shoe-shiners and taxi cab drivers in the story behind The Crash of 1929, we have farmers and grocers-turned-stock-market-goddesses today. In the words of apple farmer Liu Jianguo:
“It’s a lot easier to make money from stocks than farm work,” he told CNBC’s Eunice Yoon. “But it’s risky, you can earn $1,600 in ten minutes, and lose it all in the next.”
Can you believe that?
From our humble perspective, we don’t think we’ve seen the bottom in Chinese shares yet. The implications on consumer confidence and discretionary spending in the country will be profound, perhaps impacting most multi-national firms, if not materially then at the margin. In a world starved for economic growth, China had been a beacon of light, but no more. The government may print a pace of GDP expansion greater than 7%, but given the country’s interventionist policies to prop up an equity market, can we really trust the published economic numbers either–or are those “propped up,” too?
The question to us is not whether Chinese-listed shares will continue to fall until “true” price discovery. In our view, they will. The more pressing question, however, is whether China will be thrown into a recession, or a Depression, and if so, how that will impact the global economy–the magnitude of negatively the only question. Though we ditched Baidu (BIDU) from the Best Ideas Newsletter portfolio some time ago, our position in Alibaba (BABA) continues to keep us up at night.
We still believe a US market correction is near.
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