In my CNN interview from this morning, linked here, I explore China’s stock market bubble. Like all bubbles, this one will pop. The only question is when.
This week, China’s stock markets suffered their worst weekly losses in seven years. The Shanghai composite index was down 13%, the Shenzhen composite index down 12.69%, and the ChiNext board down 14%. These are big losses, but they need to be measured against the whopping 136%, 173%, and nearly 250% rise in these indices over the past year.
The multiples of China’s smaller cap stocks are, in general, insane. The price to earnings ratio of stocks on the Shenzhen exchange is around 70. For ChiNext it is around 120. As a point of comparison, it is 21 for the S&P 500. On average, China’s stocks are valued at multiples three times higher than any other exchange in the world. There is virtually no way that so many Chinese companies can live up to valuation multiples many hundred times present-day earnings, particularly given China’s decelerating economy.
Sadly, although the central government has been hyping equities to help state-owned enterprises and other companies address their debt problems, the burden of the bubble popping will fall on the retail investors who predominate in the Chinese markets. Once again, the poorer people, households, and people less connected to the Party will be forced to subsidize China’s elite and have little power to seek redress when the time comes (even though right now they are still probably pretty exciting about the gains so far, the case before any bubble bursts). This irony for a purportedly communist state stems directly from the monopolization of power, and therefore access to most resources, by those at the top. The Party may advance, but the people will be left with the hangover.