Showing posts with label China bubble. Show all posts
Showing posts with label China bubble. Show all posts

Thursday 10 December 2020

The 4 basic signs of a stock bubble

 There are four basic signs of a stock bubble:

1.  high levels of borrowing for stock purchases;

2.  prices rising at a pace that can't be justified by the underlying rate of economic growth;

3.  overtrading by retail investors; and

4.  exorbitant valuation.


In 2015, the Shanghai market had reached the extreme end of all four bubble metrics which is rare.  

The amount that Chinese investors borrowed to buy stock had set a world record, equal to 9% of the total value of tradable stocks.

Stock prices were up 70% in just 6 months, despite slowing growth in the economy.

On some days, more stock was changing hands in China than in all other stock markets combined.


In April 2015, the state-run People's Daily crowed that the good times were "just beginning."

In June 2015 the Shanghai market started to crash, and it continued to crash despite government orders to investors not to sell.




Friday 30 December 2011

Buffett: My job is to take advantage of the craziness of Mr. Market; whacking him when he gets way out of line



March 31, 2008

Question: What are your thoughts about the Chinese Stock market?



Buffett:


The Chinese stock market? I don’t know what markets are going to do.  When I was over in China they were bombarding me with questions about the market and of course you have these A shares, including Petro China, which was going public in China.  Petro China and others were trading at twice the price within China (at that time Chinese people were not permitted to buy shares in Hong Kong or in the United States) than outside China.  This was really extraordinary.  If you knew these restrictions were going to break down it would have been great to short the stocks in China and buy them elsewhere around the world.


But the Chinese stock market has 1.2 billion people waking up to the stock markets and having an investing or gambling urge.  The stock market was becoming wildly popular as we know in China.  Petro China at one time, based on the Chinese prices, was the most valuable company in the world, and was selling for over 1 trillion dollars, whereas Exxon was only worth 500 billion.  This made Petro China twice as valuable as the largest company in the world. 


I have no idea why and where that many people were relatively new to the market and were very excited about stocks.  You do know in the end you have to buy things on a basis of when you get a value for what you pay.  This seemed to lose relevance in a market like China.  They had a situation like that in Kuwait 20 years ago.  When a whole society, and a rich society, (certainly far richer than 15 years ago), a huge market opened up for them.  I have no idea whether the people get friendlier or crazier.  That is not my game.


My game is simply to buy something worth a dollar for 50 cents.  Then if they go crazy in the right direction it helps me and if they go crazy in the other direction I  just buy more.  


My job is to take advantage of craziness.  And that goes back to Ben Graham’s Intelligent Investor chapter 8.  If you are going to invest based on value with a partner (lets say Mr. Market) - let’s say you each own half of a McDonalds stand.  Every day he quotes a price at which he either wants to buy me out or sell me his interest.  If he hears a bad rumour he low-balls it, so I buy.  Other days he is all excited about some Burger King burning down and seeing some line ups and decides to give a high offer, so I sell.

If I’m going to have a partner like that what kind of partner do I want?  I want a psycho.  The stupider he gets the better I am going to do.  I don’t want some cool, calm rational partner.  I want somebody with huge ups and downs - a manic depressive.  Basically that’s what you get in the stock market some times.  As long as you realize he is there to serve you, and not to instruct you, you can make a lot of money.  You can’t listen to Mr. Market and think he must be right.  Only listen to what he says in the context of: when this guy gets way out of line I am going to whack him.  And basically that’s what you get in the stock market.

In China you can’t tell how far the markets will go to extremes.  You can’t tell that, I have no idea where the markets are going to go tomorrow or the next day or the next month or the next year.  I do know that in the end stocks tend to sell for what they are worth.  At least in the range of what they are worth.   They go all over the place in between - but tend to true value in the end.




A Discussion of Mr. Warren Buffett with Dr. George Athanassakos and
Ivey MBA and HBA students
Omaha, NB, March 31, 2008, 10:00 am - 12:00 pm

http://www.bengrahaminvesting.ca/Resources/Interviews_Notes/Buffett_March_31_2008.pdf

Thursday 16 September 2010

China – How to prevent a housing bubble

China – How to prevent a housing bubble

Written by Standard Chartered Global Research
Tuesday, 14 September 2010 14:17

Key points

* Wealth management products offer higher rates than standard fixed-term deposit rates
* But real negative rates mean these products do not prevent asset inflation pressure
* We expect house prices to rise more; without rate reform, nationwide housing bubble is likely

KUALA LUMPUR: There is more interest rate freedom in China than meets the eye – but not enough to stop an asset bubble forming, we believe. Real People’s Bank of China (PBoC) base rates are super-low for an economy growing at 8-10% in real terms.

The real 1Y PBoC deposit rate is currently at -1.25% (using current CPI inflation to adjust the nominal rate). In other words, depositing money at the bank costs you money. For corporates, borrowing is super-cheap, at 1% for a one-year loan (using producer price index, or PPI, inflation to deflate the nominal 5.31% rate).

As a result, while the central authorities may occasionally roll out higher down-payment requirements for home purchases or build more low cost housing, we expect a nationwide housing bubble to form in the next few years if interest rates are left where they are.

Officially, banks can offer loans at rates as much as 10% below the loan rate, and at any rate above it; on the deposit side, banks can offer lower rates than the base, but not higher.

However, there is a lot more to interest rates in China than the official rates. For instance, short-term draft financing (via instruments such as banker’s acceptance drafts) is done below the PBoC base loan rate. A reasonably sized corporate can currently obtain a three-month draft at 3.2-4.0%, versus the 4.9% base rate for a three- to six-month loan.

A big, cash-rich company can on lend to a cash-poor company, via a bank, through an entrustment loan structure, and negotiate its own rates – at present, a large multinational can lend to another large multinational, all onshore, at a rate of 3.0-3.5% for up to six months, or at 4.0-4.5% for up to one year, compared with official rates of 4.9% and 5.3%, respectively.

Non-bank financial institutions with large deposits (more than CNY 30mn) can negotiate a higher-than-benchmark rate with their banks – the rate as of end-June was around 4% for a deposit of more than five years (compared with the 3.60% PBoC base rate). And for wealthy retail depositors, China’s banks have offered a feast of wealth management products (WMPs) in recent years which offer higher returns on retail deposits for a bit of extra risk.

We recently reported on the informal banning of one type of WMP – those offered by trust companies via banks.

These products were the packaged results of corporate loans extended by banks or trust companies. As a result, they could offer relatively high interest rates (around 3% on a trust loan in March 2010).

With the removal of these products, what is a wealthy Shanghai depositor to do with all her cash? Are the banks still able to offer enough through other structures to keep real rates above zero?

What can you get for your deposit now?

We asked this question of several branches of shareholding and city commercial banks in Beijing and Shanghai last week.

Smaller shareholding banks are more in need of deposits, since they lack the branch networks of the biggest banks. We wanted to find out which rates and structured deposit products were on offer. We also looked into whether trust products have been taken off the market entirely.

Our key findings:

• Banks are not offering floating deposit rates (as has been suggested in various media reports). PBoC benchmark rates are applied to all fixed-term deposits.

• Only one bank offered anything close to a floating-rate deposit. This small bank, which opened its first branch in Shanghai recently, offers attractive rates on demand deposits, basically paying a fixed-term interest rate for the period the deposit is with them. (In contrast, if you put your money in a standard term account and withdraw it early, you are paid the on-demand interest rate of 0.36%.) This small bank currently offers a 1.19% 1M deposit rate, for example. The downside is that it only has one Shanghai branch so far, so access is limited.

• There is an array of WMPs on offer, some very short-term and low-risk. One salesperson even told us, “Fixed deposits are so out these days!” We found three basic types of WMPs during our visits to the banks:

1. PBoC bill-based products. These are issued each day, the total amount depending on the bank’s asset-liability ratio (or perhaps even the branch’s, given that Beijing and Shanghai branches of the same bank were offering different rates), and are issued on an ad-hoc basis. Products range from 7-day to 1Y, with annualised rates ranging from 2.3% to 3.45%.

2. ‘Residual’ trust products. Most banks warned us that the bank regulator is now prohibiting them from selling trust products (as we reported) and new, stricter regulations are now in place for high-risk wealth products. Most banks we visited were not offering trust loans. In Beijing, though, a couple of banks were still offering trust products which had been launched before the regulator stopped them.

And one bank in Shanghai was selling a bundled quasi-trust product which included a trust loan along with bills, bonds, and FX. This product ranged from 1M to 6M, with annualised rates of 2.5% to 3.2% – well below the rates offered on trust products before the ban in April.

3. Banks marketing others’ WMPs. One major commercial bank in Shanghai was marketing a high-yield WMPs on behalf of a relatively new insurance company. This is a 5Y product with a 12.5% total yield at maturity. It also comes with additional perks: five annual bonuses based on the insurance company’s performance (at least 1.3%, we were told) and an accident insurance policy offering five times the standard cover. One bank in Shanghai was offering a one-off bonus on top of returns for customers who bundle their deposits, equity and fund investments together and entrust them all to the bank’s partner securities broker.

On average, we found that one can expect to receive returns of around 2.6% on a 3M WMP deposit, or 2.9% for a 1Y WMP deposit, compared with the 1.71% and 2.25% PBoC fixed rates, respectively. In other words, although WMPs offer significantly higher rates than standard deposits, given that inflation is running at 3.5% y/y, these rates are still negative in real terms. (The trust companies are still able to market and sell trust products to their VIP clients; rates in July were reported to be around 8.5%.)

Banks’ policies on principal protection seem to vary. In Shanghai, several banks told us specifically that they were no longer able to offer 100% principal protection on WMPs (which suggests that they were previously allowed to). In practice, the bankers we spoke to offered a verbal promise of principal protection. However, in Beijing, a number of city commercial and large commercial banks that we visited still offer 100% principal protection in the contract, as long as the deposit reaches the maturity date.

Freeing up deposit rates is necessary to prevent a housing bubble

To conclude, while wealthy depositors have access to better rates on structured deposit WMPs, these rates are still not high enough to eliminate the negative real rate problem. At the same time, the real mortgage rate is low – a first-home buyer will pay about a 4.5% nominal rate (the PBoC benchmark 1Y loan rate discounted by 15%) for a 10-year mortgage.

This works out to 1% in real terms, using CPI inflation to deflate.

This means a property bubble will, over time, spill over in to the Tier 2 and Tier 3 cities. As soon as monetary policy is loosened, whether it is at the end of this year (as we expect) or later, or as soon as the central government signals even the mildest of loosening of housing policy, we worry that house prices will rise again – particularly outside the Tier 1 cities, where prices are already pretty elevated.

Comments from an official at Shenyang People’s Bank (a branch of the PBoC) on the need for interest rate reforms have attracted much interest in recent weeks. His idea is to allow banks to offer higher deposit rates, starting off in north eastern China.

We are unsure how much backing this idea has from the leaders of the PBoC, but the comments highlights a long-running and frustrated ambition of many at the central bank to liberalise rates and raise them to nearer to China’s nominal growth rate. As we have explained in this note, interest rate liberalisation has happened in the nooks and crannies of the market, but the base rate system still dominates, and it is unreformed.

It strikes us that allowing one region of China to raise rates would not be easy, given the ease with which money moves around the country. We also believe that, given the ‘no-change’ macroeconomic stance of the State Council, it would be hard to persuade other ministries of the rationale for raising rates, whatever the medium-term benefits (though, of course,there will never be a ‘good’ time for rate reform).

We believe that this problem needs to be solved if China is to prevent a debilitating asset bubble from forming over the next five years. Before the housing market existed, in the 1980s-1990s, liquidity had no choice but to sit idle in deposit accounts. Now a big housing market does exist, and deposits – even structured deposits – are not priced right.

Mortgages are cheap too. And that means money has no reason to stay at the bank, and every reason to continue flowing into the housing sector.


http://www.theedgemalaysia.com/business-news/173483-china--how-to-prevent-a-housing-bubble.html

Tuesday 24 August 2010

Shanghai new home sales halved in Jan-July: report

Copyright AFP, 2010 | Aug 23, 2010

Shanghai new home sales halved in Jan-July: report

Sales of new homes in Shanghai dropped 48 percent in the first seven months of 2010 from a year earlier, as China's efforts to cool the property market began to bite, state media said Monday.

By the end of July sales in terms of floor space totalled 9.11 million square metres (98.1 million square feet), the Shanghai Daily reported, citing the city's statistics bureau.

It did not provide comparative figures for 2009.Chinese authorities have issued a slew of measures in recent months as they seek to prevent the property market overheating and causing a bubble that could derail the country's economy.

The government has tightened restrictions nationwide on advance sales of new developments, introduced curbs on loans for third home purchases and raised minimum down-payments for second homes.

The property price index for July was 10.3 percent higher than a year earlier, down from a record rise of 12.8 percent in April, the National Bureau of Statistics said earlier this month.

Prices in Beijing remained flat month-on-month in July, while they dipped 0.6 percent in Shanghai and 0.4 percent in the southern city of Shenzhen, on the border with Hong Kong.

At the weekend, vice premier Li Keqiang urged local governments to implement the central government's policies to curb speculation in the real estate sector and increase the supply of affordable housing, the Xinhua news agency reported.

http://www.starproperty.my/PropertyScene/TheStarOnlineHighlightBox/6623/0/0

Tuesday 11 May 2010

Why do bubbles sometimes last so long?

Bubbles are fueled by speculators who are willing to pay even greater prices for already overvalued assets sold to them by the speculators who bought them in the preceding round.

Each financial bubble in history has been different, but they all involve a mix of fundamental business and psychological forces.  In the beginning stages, an attractive return on a stock or commodity drives prices higher and higher.  People make questionable investments with the assumption that they will be able to sell later at a higher price to a "greater fool."  Unrealistic investor expectations take hold and become self-fulfilling until the bubble "pops" and prices fall back to a more reasonable underlying value.

Why do bubbles sometimes last so long?   One reason is that nobody likes to be a "party pooper" and people ARE getting rich.  In addition, there is nothing inherently illegal about profiting during a bubble.  The only problem is getting out BEFORE the collapse.  Whoever owns the overpriced asset when the bubble pops is the loser, just as the last person standing in a game of musical chairs.

17th century in Holland:  Tulip Bulbs bubble (1630s)
1995 - 2001:  Technology Stocks bubble
2007:   U.S Housing Crisis bubble

Investing in bubbles can be quite profitable if you can get out before the bubble bursts.  However, many people who did not get out before the 'pop' saw their market crashed and their wealth value evaporated.

Bubbles are not caused by fraudulent activity.  However, swindles and accounting fraud often come to light just after bubbles pop.  Nobody is looking and few care while the good times roll.  Highly leveraged frauds often run out of cash and collapse when bubbles pop.

1963:  Salad Oil Scandal
2001:  Enron
2002:  WorldCom


Comment:  
Is the economy in a bubble?  Is the present market a bubble?  A definite not.  However, some individual stocks had been speculated up to bubble proportions and some had already popped.  Individual stock bubbles are a lot  more common than whole market bubble.

Saturday 17 April 2010

The China bubble


GREG HOFFMAN
April 12, 2010

Edward Chancellor, a member of the asset allocation team for Boston-based GMO and, interestingly, the author of a recent Financial Times piece on Australian property, is a financial historian and bubble expert.
His 1999 book, Devil Take the Hindmost: A History of Financial Speculation, examined past speculative manias. Perhaps you've read articles comparing the tech boom and 1990s' bull market to tulipmania in 1630s' Holland.
The difference is that Chancellor was making that comparison before the tech bubble burst, some years before Alan Greenspan claimed it was futile trying to predict bubbles at all.
Chancellor's timing may have been fortuitous. To accurately predict something once might mean little. To repeat the feat perhaps means something more.
His next major piece - Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain - included this prescient paragraph:
''The growth of credit has created an illusory prosperity while producing profound imbalances in the British and American economies...When credit ceases to grow, the weakened state of these economies will become apparent.''
That report was written in 2005, years before the credit bubble burst. Chalk two up to Chancellor.
Third time lucky?
He's now turned his attention to China, a fertile ground for his fertile mind. Released last week on the GMO website, China's Red Flags is split into two parts.
Crisis checklist
Section one identifies speculative manias and financial crises, offering a checklist for those trying to identify bubbles in advance of their bursting. Chancellor offers 10 criteria for what he calls ''great investment debacles'' over the past 300 years (the report explains each in far more detail);
 1. A compelling growth story;
 2. A blind faith in the competence of authorities;
 3. A general increase in investment;
 4. A surge in corruption;
 5. Strong growth in money supply;
 6. Fixed currency regimes, often producing inappropriately low interest rates;
 7. Rampant credit growth;
 8. Moral hazard;
 9. Precarious financial structures;
 10. Rapidly rising property prices;
Although all these criteria need not be present in order for a bubble to be present, you can see where Chancellor's heading: not-so-subtly steering readers towards his own conclusion. In section two he takes each factor and applies it to the case of China.
Ponzi scheme
His conclusion is alarming; The very factors that have allowed China to grow so rapidly over the past few years despite the global slowdown - an investment boom, a credit boom, massive increases in money supply, moral hazard and risky lending practices - are all factors that investors and the mainstream press feel they can safely ignore because China is growing so rapidly.
After the past few years, we should all understand the potential negative implications of such major imbalances. But there seems to be general agreement that a ``build it and they will come'' approach is warranted in China because it keeps growing rapidly. There's a Ponzi-like element to the circularity.
Chancellor is concerned that China's high GDP growth is no longer a function of impressive natural growth. Instead, growth is being engineered to achieve high GDP numbers. It's producing a system that's unsustainable and prone to collapse.
This, in essence, is Chancellor's argument:
Investors are adopting an uncritical attitude to China's growth forecasts;
Because of the way local officials are incentivised, it's likely that migration of the population from country to city is much further along than the official numbers suggest. So when you hear of another 350 million internal migrants arriving in cities by 2025, many of them are actually already there;
Hence, future productivity growth will be much more reliant on efficiency gains than urbanisation. China's record in this area isn't at all strong;
Beijing imposes GDP growth targets on local governments. Thus, ``GDP growth is no longer the outcome of an economic process, it has become the object''. `When the allocation of resources, whether at the corporate or national level, becomes all about ``making the numbers'' then poor outcomes are to be expected';
In 2009, Chinese fixed asset investment contributed 90% of total economic growth (an incredible statistic and a natural consequence of the previous point);
Significant overinvestment is present in many areas. For example, capital spending in the cement industry increased by two-thirds despite capacity utilisation running at an estimated 78%;
The efficiency of investment (incremental GDP growth for each additional unit of investment) is trending downwards towards wasteful levels;
Interest rates have been kept way too low for decades, sparking economic growth but also imbalances and bubbles;
China's enormous foreign exchange reserves are not necessarily a plus. As Michael Pettis pointed out recently, only two countries have previously accumulated such large foreign reserves relative to global GDP - the United States in 1929 and Japan in 1989. Oh dear;
The Chinese stockmarket is in bubble territory. Last October, a new Nasdaq-style exchange opened in Shenzhen with 28 new listings. The minimum price rise (the laggard of the 28) rose 76% on the first day. Price/earnings ratios averaged 150;
The residential property market also appears to be in a bubble. In Beijing, the house price to income ratio has climbed to more than 15 times, versus 9 times in Tokyo in 1990;
Assuming Chancellor is right, what are the implications for Australian investors? That's what we'll look at on Wednesday.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors.