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Generational Dynamics Web Log for 26-Feb-07
China: Shanghai stock market bubble appears close to bursting

Web Log - February, 2007

China: Shanghai stock market bubble appears close to bursting

People have been pawning their homes and borrowing money from friends and family to invest in the stock market.

Shanghai stock market index, past 5 years (Source: MarketWatch)

Shanghai stock market index, past 5 years (Source: MarketWatch)

Cheng Siwei, vice-chairman of the National People's Congress, has warned of investors' "blind optimism" and a stock market bubble.

The reasons are obvious when you see the adjoining graph of the past 5 years' performance of the Shanghai stock market. The index started taking off in the first half of 2006, and became practically vertical since mid-year.

Crazed day-trading Chinese investors watch minute-by-minute changes in stock prices at Beijing Stock Exchange (Source: CNN)

Crazed day-trading Chinese investors watch minute-by-minute changes in stock prices at Beijing Stock Exchange (Source: CNN)

There are 80.5 million open stock trading accounts, with 90,000 new accounts are opened every day, overwhelmingly "retail" accounts for ordinary citizens.

According to an analysis by the Los Angeles Times, millions of Chinese have mortgaged their homes, and borrowed money from any source available, including their family and friends, in order to day-trade stock.

This is very much like the day-trading insanity of 1999 in the United States, prior to the bursting of the Nasdaq bubble in 2000. But it's even worse in China because the Shanghai market is closed to outside investors. The result, according to Chinese analysts, is that the value of the stock market is "totally unrelated" to the companies.

I had to chuckle when I heard this last remark on CNN, because this is EXACTLY the observation that I've been making about Wall Street, and hedge funds are completely out of control.

China's entire economy has been growing into a bubble for 25 years, with a 10% growth every year for that long. This has made the entire economy dependent on this continued growth, so even a minor recession could cause social problems throughout China.

During the last year, the bubble has gone out of control, as it has with hedge funds and other aspects of the global economy.

Chinese artist Liu Xiaodong standing in front of painting Hot Bed. The painting sold for $2.5 million. (Source: theaustralian.news.com.au)

Chinese artist Liu Xiaodong standing in front of painting Hot Bed. The painting sold for $2.5 million. (Source: theaustralian.news.com.au)

In China, it affects everything, even art. Paintings by Chinese artists are selling in the millions, and prices are growing just as quickly as the Shanghai stock market index.

One person says that, bubble or no bubble, the skyrocketing prices are OK. "Even if it does crash, everything goes in cycles, and out of that will come something new. Chinese art is not going away," she says.

Obviously, these people are in for a great deal of pain, but in the case of China it's much more ominous than that.

From the point of view of Generational Dynamics, China is becoming increasingly unstable and is approaching a massive civil war as its bubble economy unravels, along with the rigid social structure originally set up by Mao Zedong in the 1950s and 60s. Today, there are over 100 million migrant workers (15-20% of the entire workforce), mostly peasants who have lost their farms to corrupt land deals by CCP officials, who take any jobs they can find in the cities and send money back to their families in vast poverty-stricken rural areas. Exactly what event will trigger this civil war cannot be predicted, but it could happen next week, next year or after, but will probably happen sooner rather than later. (26-Feb-07) Permanent Link
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Generational Dynamics Web Log for 26-Feb-07 China: Shanghai stock market bubble appears close to bursting

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Generational Dynamics Web Log for 26-Feb-07
China: Shanghai stock market bubble appears close to bursting