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The Bubble Theorists Have Shanghai Wrong

I'm convinced...

This time it's REALLY different- from every other single mania financial market history.

To paraphase that infamous Yale professor Irving Fisher:

"Chinese stocks are on permanently high plateau." ;-)

The Inevitable Collapse of China's Banks

"All truth goes through three stages:

First, it is ridiculed.

Second, it is violently opposed

Finally, it is accepted as obvious"

-Arthur Schopenhauer

The fact that China is an open (trade oriented economy) does not alter their banks' "soft budget constraint" behavior. Again, I refer you to Kornai for the more technical aspects of the microeconomic argument. Arguably, China has it worse. The Soviet Union was autarkic- insulating itself from world trade flows. China's open economy execerbates the pressure the Chinese policymakers to live up to the Potemkin Village economy they have created. The China Mania reminds me of the "this time its different" praise heaped upon the Soviet Union in the 1930s. Check out Paul Johnson's Modern Times for some juicy quotes. Also with respect to Communist party "cronies," check out the prospectuses of any of the Chinese megabanks. The corruption in these banks is rampant. One official was even given a (suspended) death sentence. But in securities law "disclosure cures all" - so there won't even be a cause of action against the banks or their underwriters when the banks implode.

When should you invest in FXI? After it's dropped 90% from its peak, and Business Week is running a cover story on corruption in Chinese banks dwarfing the corruption in Worldcom or Enron by a factor of 10 to 1.