The ViewChina stock market bubble will burst as rally not grounded in economic reality
Previous experience shows that a run of this kind can go on for quite a while but it equally shows that when the reversal comes it will be sudden and savage
All you really need to know about the outcome of the growing bubble in the Chinese stock markets is contained in a couple of figures: 4.8 million stock trading accounts were opened across the border last month and another million or so have been opened so far this month.
Most of these accounts belong to new investors coming into what they see as an ever-rising market; their buying spree has spilled over into Hong Kong.
As the markets’ historian Charles Kindelberger wickedly observed, ‘there is nothing so disturbing to one’s well being and judgment as to see a friend get rich’. When people making bucket loads of paper money in the stock market boast about their gains, those who are not in the game scramble to play.
The stage is now set for a buying frenzy heavily fuelled by novice players. Market news moves to newspaper front pages and chit chat about everyday matters is replaced by excited tales of how this or that counter surged and which hot tip Mrs Wong of Wong Tai Sin heard from her son-in-law’s second cousin.
At this point in the cycle professional investors move to the sell side of the equation creating the necessary liquidity for the hordes of buyers waving wads of cash.
How do they get hold of this cash? Well, some of it is already wallowing in savings accounts offering derisory interest rates but the hunger for equities propels the newborn investors to seek margin loans that increase their buying power. Outstanding margin loans in Shanghai and Shenzhen have surged to total Rmb 2.2 trillion, that’s more than double the total just six months ago.