China May Implode, But Broader Impact Would Be Limited

This is the chart for China Digital TV Holding Company (STV) which IPO'd last Friday as best as I can tell.

The IPO price was $16 and it closed Tuesday at $51.08 up $11.59. The day of the IPO, Friday, it was up 75%.

There have been others, both in the US and Shangai, that have gone similarly berserk.

From the top down, this is the same thing that happened during the Internet stock bubble. This is something I have mentioned before a few times, and it is a very common pattern. China is most certainly at least a mania. The returns have been huge, the demand is extreme and so to meet that demand there are now a lot of IPOs, and they are all very hot.

So far this is exactly what happened from 1998-2000. I would add that this will happen with just about every mania in the future as well.

All along, I have never said China was a "bubble" because I believe that is the wrong term. For all I know the Chinese market may drop 50% like the S&P 500 or 75% like the Nasdaq, but the difference, I believe, will be that it does not take every market down with it in the same manner as happened in 2000.

Because of what happened so recently in 2000, I just do not believe that a China plummet, if it happens, will be the all-encompassing bloodbath that we had at the start of the decade.

The recent action in the homebuilding stocks supports this notion. Year to date, Toll Brothers (TOL) is down 30%, Centex (CTX) and Lennar (LEN) are each down 50% and Beazer (BZH) is down 80%, yet the stock market has had a very good year so far. There has been a lot of content in the last couple of years saying how important this group is, yet it has imploded as bad as the S&P 500 seven years ago and the broader market seems not to care.

So I believe it will be with Chinese stocks if they ever implode. Maybe someone will leave a well reasoned comment explaining why China is different and fundamentally that may be true, but for now there are similarities to the Internet days.

Comments

[User 112529]

Whenever people say this time is different........
it's not.
The same thing happened in 2000
everything was different...

it's not...

[Uncle Bill]

You're just guessing. As usual, no alpha here.

[User 112551]

China is different because it's not about the the birth of a single industry. It's the modernization of an entire country with the benefit of utilizing efficiencies that have already been established in the western world.

[FollowingChina]

When China faces it's "big correction", the US markets will definitely take a big hit (at least low double digits). Falling home builder stocks not affecting the stock market in general is not the right comparison, since as a contributor to the major companies' earnings, homebuilders are a smaller part than ever before. Most of market rally this year has been because of the exponential growth in American business because of Chinese (and other emerging economy) demand. Once the Chinese stock markets take a hit, the US markets will at least feel the pain. However, I would expect the market to bounce back after a temporary (possibly a few months)set-back, because while the chinese stock charts are unreal, the chinese economic growth is real and that is real dollars flowing into American company coffers. During the dot-com times, the stock charts "AND" the companies were unreal.

[Dick]

I don't agree. A China implosion would reduce Chinese demand for raw goods and manufactured goods sold by the rest of the world. The Chinese component of this worldwide demand is huge. It could cause a worldwide recession.

Dick

[focus]

Foreign investment and Govt. spending play a much larger role in the Chinese economy then the stock market. If the markets had a major correction the affects on the Chinese economy would be short if any and other markets would only be affected in a psychological way due to the fact that institutions are not highly exposed if at all, currency arb and fixed income are not existent

[focus]

Foreign investment and Govt. spending play a much larger role in the Chinese economy then the stock market. If the markets had a major correction the affects on the Chinese economy would be short if any and other markets would only be affected in a psychological way due to the fact that institutions are not highly exposed if at all, currency arb and fixed income are not existent

[TekToniKshift]

Several factors may precipitate a severe China stock market correction. An inefficient and grossly miss-manged banking system. Strong inflationary trends. Rising social unrest. Severe income disparity.
Any misstep by party leaders can trigger a loss of confidence in the "system".
China stocks will "correct", the question is when. The correction will hurt US markets and all commodity producers, the question is how deeply and how long.
How to play: diversify across several emerging markets and large cap industrials. Plus take some profits on the way up.

[Mike G.]

I don't think it's quite that straight forward. If for some reason the world suddenly finds reason to find China vastly over valued, China's falling stocks won't necessarily bring us all down with it. But if the underlying reason for the suddenly "less valuable" stocks is a Chinese recession or run away inflation etc. then that's a very different story. A sudden lessening in demand for most commodities, etc. could turn global markets upside-down at least for a time.

[HH99]

Misleading. Study about China first if you want to comment on Chinese stocks. Here is an example of a good analyst.
seekingalpha.com/artic...

[Haav Bline]

I felt the wisdom presented in this article is very CONVENTIONAL. And therefore highly suspect.