Where does the trouble in China lie?

Jul 9, 2015

- By Bill Bonner

Bill Bonner
London, England

Dear Diary,

This morning, a desperate message came from our analyst in Beijing, which puts us in a lighthearted mood:

    I'm sure you must have heard about the recent disaster in Chinese stock market.
    It's my first time experiencing something like this and to some extent it shocked me.
    It's like the world is suddenly turning up-side-down and every one is running for themselves.
    Hopeless is how people feel right now as they see so many government bailout plans fail.

    There are so many rumors going on and I can't differentiate the truth.
    Some even said that it was the U.S capital shorting the Chinese index futures.
    Here at the Diary, we always look on the bright side: we see opportunity everywhere.

US investors seemed to wake up yesterday with a start. They didn't panic, but they were at least beginning to worry. The Dow lost 261 points. There is probably a lot more where that came - an opportunity on the downside.

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To recap:

The Germans have given the Greeks until midnight tonight either to come up with an acceptable plan - or get out of town. Nobody knows what will happen. But in Greece people are pulling as much cash out of ATMs as they can. There have been lines at gas stations and food stores, in some places. And Greek stocks are now selling with as much as 20% dividend yield and just over 2 times earnings. (This appears to be an opportunity on the upside -- the time to buy stocks in Greece!)

Meanwhile, back in China, stocks have lost $3.5 trillion worth of value in the last 2 months. The Chinese are not sophisticated investors. They have only been at it for a few years. So, they tend to get over-excited in both directions - up and down. It was only a few weeks ago that brokers in Shanghai were opening new accounts in record numbers, as the stock market soared.

And this wasn't the first time. Between 2005 and 2007, Chinese stocks rose nearly 600%. Then too the moms and pops rushed in hoping to make their fortunes. In 2008, the market crashed, losing 70% of its value.

More recently, stocks gained almost 150% in a little more than a year. Now, it's down about a third.

These ups and downs are great for seasoned investors. The idea is to buy low and sell high. What better place to do it than where prices go very high and very low? When you are investing in equities, you either earn money as your companies become more profitable...or you take money from other investors. So, if you are hoping to make money in US stocks, you have a hard row to hoe. The real economy is barely growing and corporate profits are already near record levels. There's little reason to expect much more. So, if you're going to make any real money you'll have to take it away from your fellow investors. That won't be easy.

China is an easier market. First, the economy is still growing at a reasonable rate. And there are so many gamblers in the stock market. They buy too high and sell too low.

Yesterday, Shanghai stocks surprised to the upside, with a 5% jump. The biggest gain since 2009. Most likely, this was not a genuine bounce; it was the result of government rigging. Investors tend to do dumb things in China; so do regulators. IPOs have been restricted. Trading has been halted in many shares. The financial industry has been pressured to put its own money behind the stock market. And the financial press - including our office - was warned not to say anything 'negative.'

Of course, we never say anything negative. But when stocks fall, it is a positive thing. It is an opportunity. It means you can get more for your money. It also means fewer resources are drawn into the financial sector, leaving more for the productive economy.

The trouble in China has little to do with the stock market. The trouble is in the economy itself. It is managed, controlled, and centrally planned - by zombies. China is just another front in the Zombie War, with the authorities under more and more pressure, fighting to hold onto their power, their money, and their status. The immediate result of this is that there is too much debt and too many bad investments made with it. And the zombie feds are using all the tricks in the book to try to prevent a real correction - just as they are in the US.

This has wide ranging repercussions. China is a big consumer of commodities. Mining stocks have lost $143 billion -- nearly 20% of their value in the last 10 days, according to Bloomberg. The oil price has fallen too, with some analysts now saying they expect it to drop as low as $20 a barrel.

China could be going into a recession...or even a depression. Unlike Greece, the Chinese economy - the biggest in the world -- will have a huge effect on the rest of the world.

We wait to see what will happen next.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Where does the trouble in China lie?"

autar krishen koul

Jul 9, 2015

The Chinese bubble seems to be about to burst.How long can a goverment subside its industries by providing them subsided and cheap elrctricity and raw materials.The law of economics has to come into ply one day and it seems day of reockenig has come for chinese industry.If China is in free market ecinomy, then it has to play by the rules of free market dynamics.It is un precedented to know that govt. there is pressing life insurance companies to invest in the share market to keep the stocks at higher level. This is cause for further trouble for small investors.We should learn lessons from Chinese markets. It is better to developelop at a reasonable rate than at a rate which is artifical and supported by govt. subsidies.Also inflation has to be kept in control, as otherwise voters are sure to turn against the govt. inspite of good growth.

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