Chinese puzzle on stock market

Former Fed chairman Alan Greenspan expressed his concern about the bubble of Chinese stock market in a speech at the LSE on Monday evening. It was not the first time that he used the word "bubble" to describe the bullish (or bubbly) Chinese stock market.

However, over the past year while outside experts keep forecasting the China bubble through the crystal ball, the Chinese stock market has kept bullish for very long. When the index soared to the point of 3,000 from 2,000, there was mounting speculation on bubble going to burst. But the market continued to shoot upward as the Index has crossed the point of 4,000. In China, talk about stocks is as common as English talk about weather. There is a joke which says " now in China the buying and selling of stocks has become a national game".

So how much weight should we give to the argument by Mr. Greenspan, who has been hailed as the greatest central banker who ever lived? Should we turn deaf ear to it, or should we really need sit up and take notice?

As a matter of fact, even Chinese scholars themselves have expressed concern over the stock bubble, arguing that the market has been distorted and become very hard to be explained through normal economic theory. For example, in the stock boom, many junk shares or shares of ST companies (those listed companies which have been under special treatment for bad performance) turned out to record fastest increases in stock prices. The market is probably being manipulated by some unhidden hands or insider trading, which could turn out to be a timed bomb. Besides, some scholars pointed out that most of the listed companies are not the best performing companies such as the foreign-owned companies or privately-owned companies. so the market boom is not really sustainable and doesnot really reflect the true performances of those listed companies.

But how could we explain the continuous boom of the Chinese stock market?

Clearly, we are talking about the stock market in a country whose economic and political system is so different from the rest of the world. So the western economic theory should not be simply generalised to the Chinese market. There are some factors which have supported the continous boom. Firstly, its the continously fast growth of Chinese economy which constitutes a favorable macro environment for the stock market. Secondly, the continous appreciation of Chinese currency Reminbi means the value rise of Chinese properties, which consequentially will be reflected in the stock market. Thirdly, also due to the expecation on appreciation of Renmibi, international hot money continues to flood into China, and stock market, along with property, become the major hunting ground for investment. This has also contributed to the boom of Chinese market. Fourthly, inflation is still there in China, which could increase the turnover of some listed companies and lead to a unreal fantasy that the companies are performing well.

But no matter how long the boom could continue, it is certain that the bubble is right out there. The question is how big that bubble is? Is it not serious so that there would be only a minor market correction, or it will turn into a big disaster, both economically and socially, for both China and abroad?

It is a Chinese puzzle. Greenspan could assert that there is bubble, but I challenge him to give a clear picture on how serious the bubble is.