You have to hand it to the Chinese government, which has turned attention away from the mess that is Chinese real estate and toward the Chinese stock market. Monetary easing and other measures have ignited what seems to be nothing short of a mania there. A record 8 million new trading accounts were opened in the first quarter of 2015 alone.
The Shanghai composite is up 150% in the past year, and the tech-heavy Shenzhen Composite has tripled. Even higher returns have been found in China’s NASDAQ equivalent.
A recent article from The Economist, “A Goring Concern” shows some figures suggesting “irrational exuberance” lives in China. Examples:
- The median P/E in Shanghai is now 75;
- Margin debt has increased five-fold to $325 billion in the past year;
- 6-9% of China’s market capitalization is funded by credit, or five times higher than the developed world;
- 80 listed Chinese companies have changed their names in the first five months of 2015, many of which are getting into technology and other areas favored by the market.
We having been watching China’s debt binge with increasing interest. China’s total debt has nearly quadrupled since 2007, from $7.4 trillion to $28.2 trillion, or from 158% of GDP to 282% of GDP. A frothier and frothier stock market only raises the risk something bad is coming.
When is anyone’s guess. Bubbles of all kinds share a number of traits, including this lesser-known one: they last longer than people expect. Alan Greenspan’s famous “irrational exuberance” speech was in 1996, four years before the U.S. stock market top.
All we can do is watch, and make sure we have a chair when the music stops.