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A bartender at my neighborhood pub recently asked me how the Shanghai stock market was performing. I said it was at about 2,600 points. He jumped and said, “No! The Communist Party wouldn’t let that happen.”

He spent the next 10 minutes trying to convince me that the Communist Party would make the market rise to 8,000 in the next three to five years.

“Look, the Hong Kong market is at 20,000,” he said. “Shanghai at 8,000 would be very reasonable.”

-Andy Xie

Macao Casino Lisboa at night 150x150I certainly was reminded of Joe Kennedy, shoe shine boy and the Great Depression as I read this quote. And this isn’t the only parallel between China during this crisis and the United States during the crisis that became the Great Depression. Back in the 1920s, the United States was the world’s largest creditor with the most gold reserves. Today, China holds the role as Alpha creditor and reserve king. In the 1920s, the US ran a loose and expansionary monetary policy at the request of the British after a mid-decade slump. This set the stage for the blow-off top of speculation and corruption we witnessed in the Roaring Twenties. Today, it is China who has saved the world from a terrific clump with an awesome campaign of stimulus and equally impressive expansion of credit. We should remember that when things went horribly wrong in the 1930s, America suffered most.

Today, China is in its own blow-off top of speculation and corruption. But, all bad things must come to an end. And with the government attempting to engineer a soft landing, shares have already turned south.

Rich people aren’t in the stock market anymore. They are in the property market. An overwhelming majority believe real- estate prices only go up, not down. The people in the market today have no recollection of the market crash of 1997.

The stock market, on the other hand, experienced a crash in 2007-08 — from 6,000 points to less than 1,700 in one year. Those who can afford to play the property market find the stock market a bad place to be. This is why real estate has kept booming since 2007, while equities have been struggling. Of course, when the property market drops like shares did in 2007, the stock market will be treated more fairly.

Stock-market investors in China often can’t afford to enter the real-estate market in big cities. They wish to get lucky, make enough money, and move on to the property market. This force caps the market upside, but not the downside.

My bartender finally asked me to recommend a stock. He said he had 70,000 yuan and wanted to make enough money to buy a car.

At least, the bartender is asking for stock market tips instead of giving them. There is hope yet.


China’s Stock Market Has Become a Poor Man’s Casino: Andy Xie – Bloomberg BusinessWeek