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China: Storm Clouds or More Money Showers?

Chinese stock markets have been on fire lately. The Shanghai Stock Exchange Composite Index (SHCOMP) is already up more than 50% year to date, and if Shanghai is on fire then the Shenzhen Stock Exchange Composite Index (SZCOMP) has gone nuclear, up over 100% for the year.

Some believe a correction is overdue. And while it looked like the market was (finally) trying to beckon one again today, things had backed off by close.

SHCOMP flirted with a sharp drop just after lunch but erased those losses by end of day (up 0.76%), while SZCOMP also turned south but then managed to erase almost all of the day’s losses (off about 0.58%)

DID THE U.S. “BOND KING” SPOOK THE CHINESE MARKETS?

It seems like everyone likes to predict the next “short of the century.” Janus Capital’s Bill Gross appears to be no exception. On Wednesday, Gross tweeted, “German Bund ‘Short of a lifetime’ update—it’s happening. Up next—China Shenzhen index. Not just yet…”

Many who saw the tweet took notice, and more than a few on this side of the world took issue with it. Most seem to think it is too early for a deep correction, and others like Gross seem to be looking at SZCOMP with more pragmatic eyes focusing on bloated valuations.

Shenzhen is a major city in the south of Southern China’s Guangdong Province, situated immediately north of Hong Kong and considered her rival. If Hong Kong has been the darling of Asia for decades, that makes Shenzhen the ugly stepsister plotting and planning to take her place.

The area became China’s first, and arguably its most successful, Special Economic Zone (SEZ). No longer in Hong Kong’s shadow, it has built a reputation as China’s own Silicon Valley. It is a city that attracts some of China’s best and brightest young people looking to become the next big thing.

It is also home to a stock market filled with small caps that has been on a tear lately, fueled by retail investors with a thirst for crazy short-term returns. Whether this is because Shenzhen sits so close to Macau, or the southern heat, or the spicy food, or that Shenzhen is experiencing its own “dot com” bubble is anyone’s guess.

Betting on Shenzhen’s demise will not be easy, though. Unlike U.S. stock markets, Chinese markets are filled with gambling retail speculators that have been proven quite resilient over the years. Punting against these exuberant investors has not been a smart play, and requires a resolve that only few can actually afford.

In addition, the Chinese government has shown that it is willing to throw money at the stock market at the first sign of trouble. China is sitting on the largest foreign exchange reserves in the world, so it would only make sense to speculate that the Chinese government will stimulate, ease, and do whatever it takes.

If there is one important lesson that China has learned from the U.S.’ empire building is that it is all tied to a frothy stock market. So hedge your bets wisely—if you’re in this market—because it looks as if it’s going to be an unpredictable (and fairly uncharted) ride.

  • Franz

    You know the author wanted to write “golden showers” in the title but backed down.

    • Franz, looks like it was storm clouds with dash of fear. You’ll have to solve your golden shower issue by yourself.

      To buy the dip or not is the question….