A Bubble in Shanghai?

12/17/2014 12:01 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak reviews the recent sharp surge in the interest and participation in the Chinese stock market.

Okay so there is no doubt that what we're looking at right now is a bubble in the Chinese stock markets; Shanghai, Shenzhen, and Hong Kong.

We've seen this bubble exactly the same way before, which is why it should feel, not only very familiar, but pretty certain that's where we are. What we're seeing is a huge rush to open brokerage accounts from November 24 to December 5, Chinese investors—let's call them traders/speculators/whatever—have opened an average of 94,000 accounts a day. These are stock trading accounts. Then we had a huge spike and one day total of way close to almost $200,000 on Friday, December, 4.

We've got that going on, so more people trying to get into the game as well as more people borrowing money to play the game. We've seen a 70% increase in margin loans from brokers to traders since September, so more and more people want to play, which means they're drawing people in with less and less experience. More and more lending to fund these trades, which means that you've got a lot of people who really don't have the wherewithal to survive a downturn.

All this means is the market is getting more and more 'bubbalicious' and the question is, as always, where it stops. I think there you have to sort of think about the politics of this. The expectation right now is that the Chinese government has entered into a period of putting more cash into the market that is a bubble that they want to see. They want to stock prices moving up. They're supporting developers and you can look and see what's been moving up and it's all the standard cash flow stuff. When the People's Bank puts more money into the market, real estate developer stocks go up, banks go up, all those standard things that would go up when the cash flows, so that's the expectation. Is that right? Is that wrong? I think it's a good possibility that expectation is right for a while.

The current campaign against corruption seems to be about consolidating power. I think we've got enough worry going on there in the leaders of China who have just taken power two years ago. They're trying to consolidate a position and I think they want to make sure that whatever happens in the financial markets and in the economy is going to be a positive. They don't want that worry piled on top of whatever worry they might have about their opponents would do, so I think there is a good chance that this bubble will get more inflated before it busts, but we're definitely in that part of the cycle now in China.

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