China's A-share investors deserve a bull market that's no bubble

Finally, some of China's "big mamas" are back in the market after dancing in the square. It took them six years to dance away the painful memory of the big losses of 2007 and 2008, but now China's legions of dama, or middle-aged housewives known as much for their fondness for dancing as for being a force in retail investing, are ready to be cajoled back into the market again. And, sure enough, the "professionals" are more than ready to pump them up with the get-rich-quick dream.

I gave a talk at an investor seminar in Shanghai three months ago. "Forget about the economy. The bull market is coming," one guy stood up and yelled at me. There are many players who can no longer wait on the sidelines.

This is one force behind the recent surge. They are players who have won, on the whole. But a bubble also needs losers. China's big mamas are the fuel for past bubbles. If this one lasts, which I doubt, it will need more big mamas than ever.

The trick for an A-share market bubble is lasting momentum. When an uptrend takes hold, the dancing crowd in the square shrinks. And, the market peaks when the thousands of public squares in China are emptied. Against the "big mama" trend is all the players on the other side who want to cash out. When too many on that side can't wait, the market just spikes and crashes. Most surges of the A-share market have been spikes.

A rare three-year uptrend took hold from 2005 to 2007, when the A-share market surged from 1,000 to 6,000 points. Two factors made it possible. One, after China came out of deflation in 2004, the money supply began to surge and people's pockets began to overflow. They became vulnerable to get-rich-quick propaganda.

Two, in 2007, the government made "legal person" shares - those owned by a company or institution with legal person status, and which made up two-thirds of the total number of shares - liquid. Hence, the market predictably crashed after all the shares became liquid.