China and the Business Cycle

Could the phenomenal growth train get derailed?

I remember my colleague Clive Granger telling me over a year ago about the conversations he had with people when traveling China. Everyone he spoke with seemed to believe that (1) the Chinese stock market was at that time experiencing a bubble that was going to burst, and (2) the crash would not come until after the 2008 Olympics. Clive expressed amusement that no one seemed to have worked backwards from this presumed equilibrium-- if you know the market is going to crash in August 2008, anybody with any sense would sell in July. And if there's heavy selling volume in July, the market's heading down, not up at that point, so the logical thing to do is to get out in June. But if the crash is going to begin in June, then what you should really do is....

I was reminded of Clive's remarks when I saw CR's graph of the 50% plunge in the Shanghai Composite since late last year.

Source: Yahoo.

So why didn't you tell us this story a year ago, you ask? Sorry-- it slipped my mind until just now.

Calculated Risk went on to connect a few more dots, asking what might happen to China's economy if higher transportation costs indeed start to reverse the recent growth in world trade.

Not to worry, though. Yesterday the CSI 300 surged back up over 5%. And besides, the Olympic Games are still a couple of months away.

Comments

[Charles Hedden:]

It is no surprise that the Shanghai composite is slipping. Yes it was a bubble, at one point it was trading at P/E multiples north of 70. Though the capital markets are not well integrated into the global economy, China's real economy is. As China maintains a tight band against the dollar even amidst its slide (which arguably it must do to maintain a competitive export market) it is generating more domestic inflation than the U.S. economy, add to that the inefficiency of the People's Bank of China's monetary policy tools and a downturn in the economy of its biggest export market, the stock market was bound to slide. This plunge will not likely hurt China's real economy the way a similar equity drop would hurt the U.S. mainly because the average individual's wealth is not that tied to the market as it is in the United States. So the dragon will likely keep charging on, though its stock market may not.

2008 Jun 19 10:27 PM

[rdr4:]

Why do people who know so little about China continue to make predictions? The media can't even get their stories straight.
In one day I see that China is importing less fuel and producing more fuel, later that same day, I see the opposite reported and both sides used to support speculation.
AP in particular seems more interested in the "think tank spin" than actual research. (for instance: the Chinese resist dialogue with the Dali Lama because of his cooperation with the CIA in passing of espionage documents out of Russia through Tibet. How many times did you see that reported in US media? In perspective, the US conquest of Hawaii was an act with far less justification than the deposing of the Lama.
Actually, It is no surprise that the Chinese resist US guidance, they're already beating us at our own game and look at the unstable economic platform our wisdom has produced here.
Pardon my rant, good will toward all.

2008 Jun 20 09:41 AM

[Charles Hedden:]

rdr4 - I'm curious as to your background in China.

2008 Jun 21 12:05 AM

[johnthebear:]

Mr. Hamilton got it right when he said "so the logical thing to do is to get out in June"

The 10% rise in FXP on Friday reflects the future of the short market on China. That is a bet I have made big time.

With the surge in fuel prices in China, we are about to see the collapse of the bubble, IMO. Not speculating... I am a betting man and I have a lot riding on the bet. Not sure what the difference between the terms is, but when you put hard earned money on it, you can bet it took a lot of thought and research.

2008 Jun 21 04:15 PM