09 July 2015

Time to “Freak Out” About Chinese Stocks? Depends on Who You Ask

Eric Fish, “Time to ‘Freak Out’ About Chinese Stocks? Depends on Who You Ask,” Asia Blog, Asia Society, 8 July 2015.

The past year has been a roller coaster ride for Chinese stocks. The Shanghai Composite Index shot from 2,000 points in July 2014 to nearly 5,200 last month, but now it continues to plunge, closing just above 3,500 on Wednesday. Since June 12, the index has fallen 32 percent while the Shenzhen market is also down 41 percent. Over $3 trillion in value has evaporated. …

Inflating the Bubble

For months, analysts have been warning that China’s markets were distorted. Writing in The Wall Street Journal, commodity analyst Gabe Collins and China SignPost co-founder Andrew Erickson explain how Chinese stocks’ meteoric rise paradoxically coincided with a “rapidly slowing real economy and largely tepid consumer economy” — hardly a sustainable situation. They go on to explain how this is symptomatic of much deeper issues in China’s economy.

In [a] video interview with The Wall Street Journal, Silvercrest Asset Management Managing Director Patrick Chovanec expounds on how the market’s fall “rips the mask off where the Chinese economy really is.”

CNN explains that the initial bull market was partly a result of state media hype. In April, the Communist Party’s official mouthpiece newspaper People’s Daily declared that the stock surge was “just beginning,” which sent a misleading signal to investors. “The common perception since last summer has been that the government wanted a sustained rally and would act to keep it going,” Mark Williams of Capital Economics told CNN. “Official media were trumpeting the markets’ rise and even suggested that skepticism about it reflected a lack of confidence in the leadership’s plans for economic reform.” …

Click here for full text of the article quoted above: Andrew S. Erickson and Gabriel B. Collins, “Stock Slump Casualty: The Myth of Chinese Exceptionalism,” China Real Time Report (中国实时报), Wall Street Journal, 6 July 2015.

Related analysis: Gabriel B. Collins and Andrew S. Erickson, “Three SignPosts to Guide You as China’s Stock Market Crisis Unfolds,” China SignPost™ (洞察中国) 90 (5 July 2015).