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By HaleStewart April 23, 2015 10:54 am
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Yes, China's Market Is In a Bubble, and No, It Won't End Well


     The above three year chart of the Chinese stock market shows things: a long slightly downward sloping consolidation trend that lasted until September of last year, when the market went parabolic, doubling in price over 6-7 month period.  This latest period of price action should indicate that China’s economy has fundamentally changed for very bullish reasons.  The underlying data, however, says the exact opposite, meaning the above the Chinese market is in the middle of a speculative frenzy that has a high probability of ending very badly.

     Let’s start by looking at top-line GDP growth.  In response to government stimulus, the annual growth rate rose sharply after the last recession, climbing to just under 12%.  But the rate of increase has slowly decreased since, printing at just below the 8% level for the last three years.  With projections for slower growth, it’s difficult to see the above data sparking a buying frenzy.

     The Chinese consumer is also slowing down.  This is a huge problem because the Chinese government wants to increase consumer spending to decrease the economy’s reliance on capital investment as the primary source of growth.   The year over year increase in retail sales is clearly decreasing, falling from just under 18% in 2009 to its current level ~10%. 

     Chinese business is also slowing.  The year over year percentage change in industrial production is also decreasing, falling from 14% right after the recession to its current lebn.vel of just under 6%.  This decrease has long been telegraphed by the Markit PMI numbers:

Right after the recession, the headline number printed between 54-56.  But for the last three years, that number has decreased to between 50-52.  Although still positive, thes

     None of the underlying economic numbers indicate the value attached to the market before the rally was too low.  In fact, all the economic numbers indicate the market should, at best, be treading water, like it was before the massive rally.  That means we're most likely in bubble territory, which never ends well.



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