Of Bubbles and Tremors in China

by: Larry MacDonald

Early Thursday, Chinese stocks sold off sharply following reports of overheating in the Chinese economy, which will likely elicit further restriction by government officials. Is this latest correction another tremor before the earthquake?

More than 1 million new accounts have been opened in the past week by Chinese retail investors, reports the Financial Times of London. This brings the total for the last four months to more than 10 million, which exceeds the total opened during previous four years combined.

A buying panic is in full flight following the 130% gain of last year and 40% year to date. This wave of new money has taken Chinese equities to new highs after the sharp corection in February.

Signs of a bubble are becoming more apparent. This could end badly for Chinese investors, who are all rather new to this game. The long-term, secular trend may be up for the country, but there should be cycles around the trend, some euphoric and some traumatizing.

Don’t mistake the high earnings and sales growth of the euphoric period for the underlying secular rate of growth. That’s what happened with the tech mania in the U.S. and look how it ended.

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