Will the Chinese Bubble Burst?

Oct 25, 2007 by Adam C. Powell, Ph.D.

 

 

The Skyline of Shanghai, China

For the past several years, I have invested in China through FXI, an Exchange Traded Fund (ETF). FXI tracks the FTSE/Xinhua 25 Index. The performance of FXI has been truly amazing.

Perspectives of the Readers

In the two years that elapsed between October 2005 and October 2007, the ETF’s price quadrupled. As a result of its fast ascent, many investors are worried that China is experiencing a bubble, which will eventually pop. To assess the reactions of everyday people, I asked users of mturk.com the following:

1. Will the Chinese stock bubble burst?
2. If it will burst, when will it burst?
3. If it bursts, why will it burst?
Here are the responses that I received:

1- I don´t think so. 2- It won´t burst. 3- It will not burst because most people think its going to burst. When some kind of stocks have too much volume they fall or stop going up, this is what i think it´s going to happen with chinese stock bubble.

1. Yes I do belive that the chinese stock buble will burst. 2. As soon as america make its demands on quality control over how they make our products and what with 3. Due to the toxins and poisons that they have been putting in products like toys and shipping them here to america and allowing our children to play with lead covered toys, and since a huge part of their economy depands on exporting to us it will deffintly burst the bubble.

Yes it will burst, and it will do so within the next few years. The growth projections that are implied by current valuations are already sky high, and current growth is, in my opinion at least, only being fuelled by investor speculation. Lack of proper financial information about Chinese companies, and a captive home audience are the two major factors continuing to drive the Chinese market higher and this cannot continue indefinitely. When the bubble bursts, it will burst with a very loud bang.

1. Of course it will burst. 2. I would guess it will burst sometime next year 3. It will burst because it is similar to our credit crunch in the United States, they have many assets that are overvalued or they are not sure of the value which means that people are buying securites when they have no idea what they are buying. This is common in all markets. Investors see the run up in price and decide they want their piece, however, most of the time the run up is overvalued, but investors continue to buy.
1. Yes the Chinese stock bubble will burst. 2. I give it roughly 6 months before the Chinese stock bubble bursts. 3. Chinese companies are more and more likely to fail because of faulty products and cheap labor. China has a world wide reputation for cheap products.

1. Yes the Chinese stock bubble will burst. 2. I give it roughly 6 months before the Chinese stock bubble bursts. 3. Chinese companies are more and more likely to fail because of faulty products and cheap labor. China has a world wide reputation for cheap products.

Yes, the Chinese bubble with burst. I have been to China and do not understand how the “build it, they will come” philosophy can be economcially sound. I have seen the government open shops that have items that the Chinese in the small cities where the shops are located (for example, a bedspread that costs equivalent to $200 US )can not possibly afford to buy. There is also a seriously huge gap between the rich and the rest of the people. Eventually, those left behind will be challenged. And there is a huge educational gap between the rich, and professional class, and the rest of China. Those with money can afford education-the rest can’t and do not get education. I can not predict when it will burst, but in my opinion, the stride toward a capitalist type market is not follow by good solid economic fundatmentals. (I was in China in recent years as a teacher of English.)

The Chinese stock bubble, in reality, is not a bubble. We are lookng at a market that has huge potential. Perhaps the fine tuning is not present at the moment, but each week the mass world appeal increases. The only danger of a burst is minute and if it should happen, one could only regard it as a short term correction.

1. Yes it will burst. 2. It will burst in less than 10 years from now. 3. It will burst because the Chinese are dealing with new machinery now and their manufacturing cost is relatively low. They are dealing with a lot of fixed cost and very low variable costs. This allows them to price their products very cheaply. When their machinery gets older and they have to spend more money and time to maintain the same level of production, then their variable cost will increase. This will cause inflation. Their reaction will be to increase prices to cover it; buyers will purchase the product elsewhere causing the bubble to burst.

1. Though the current Chinese stock bubble is quite volatile, it is not expected to burst the way we see elsewhere. 2. It is not expected to burst. 3. The main reason is that the authoritarian Chinese communist regime keeps a close, strict and continuous monitoring of the situation, and defaulters can expect strong backlash and punishment from the regime. So that itself is a strong dis-incentive for them.

My Perspective

I think that the notion that China “will be safe until the 2008 Olympics” will be a self-fulfilling prophecy. If people pull money out of the market as a result of the Olympics, it will inevitably tank. The tanking will be caused in part by the hysteria resulting from the increasing fear that the market will tank. At the moment, I am investing in China. I’ve never seen more construction in my life than I saw in Shanghai. The nation has a lot of room for growth, and an undervalued currency.

Money can be made by investing in China in two ways. First and foremost, stocks will appreciate through the growth of Chinese industries. Secondly, money can be made by owning foreign assets as the dollar weakens. As the U.S. has a great trade imbalance with China, it is useful for the dollar to weaken with respect to the yuan, as it makes American goods more affordable to Chinese consumers. Thus, I feel that it is likely that the yuan will only strengthen relative to the dollar. As an American, I would rather have my money stored in yuan (or Euros or yen for that matter) than stored in dollars, as I feel that the dollar will continue on its downward path. Over the course of two years, the exchange rate has gone from around 8 yuan to the dollar to around 7 yuan to the dollar. Assuming nothing else happened, if I had converted my money into yuan two years ago, and then converted it back into dollars today, I could have made a 14% profit. Due to this phenomenon, I hold very few dollars in American assets. Given the choice between owning two equal companies, it is to my advantage to own the company whose value is denominated in a currency that is likely to strengthen over time relative to my native currency.