Will We All Be Burnt In The Chinese ‘Stir-Fry’?
In a recent note to clients, Jerry Lou, a China specialist at Morgan Stnaley, said his mother’s neighbours weren’t speaking to him – he’d advised them in January to steer clear of shares. The market duly suffered a sharp one-day correction in February, but that is long forgotten.
Buddhist monks, pensioners and housewives are flocking to take part in China’s biggest “stir-fry” – local slang for the new national sport of speculating the stock market.
The Shanghai index has recently hit 4,000, just three weeks after passing 3,000, yet still they keep coming. More than 10 million Chinese small investors have opened broking accounts this year, and numbers show no signs of falling.
Public warnings from senior officials would once have been enough to trigger a sell-off, but hitherto obedient Chinese now ignore entreaties – mainly because they’ve nothing better to do with their money. Leaving it in the bank means expensive negative returns after inflation and tax; the property market is expensive and frothy; and, unless they’re rich enough to get round the law, they’re not allowed to take their money offshore.
Share trading offers a rare chance to flout the Communist ban on gambling – no mean incentive for a nation that has never lost its taste for risk.
What can the authorities do? They could increase the savings rate, but even doubling that might not be enough; they could float more state-owned companies to increase the supply of shares, but that can’t happen instantly; or they could loosen the rules on moving cash abroad, but that would be a big philosophical leap.
It’s a measure of the pressure on Beijing that the window is beginning to be prised open. Regulators have recently given investors their first opportunity to to invest in foreign equities – raising the possibility of a “wall of Chinese money” hitting global markets.
Strict quota rules mean we’re unlikely to be deluged by the full $4,400bn currently stashed in Chinese banks, but the move is a milestone. It’s also a reminder of the West’s growing vulnerability to the vicissitudes of the Chinese investment market.
Shanghai’s February plunge panicked Wall Street into its biggest one-day slide since 9/11 and few doubt that when the current bubble bursts its impact will be profound.
The authorities appear terrified of triggering a crash ahead of the Beijing Olympics, but the more the bubble swells, the greater the pain when it bursts. For most of us, the sooner that happens the better.