James Surowiecki writes:
Of seventeen hundred stocks on the Shenzhen Exchange, only four have fallen this year, and more than a hundred have seen their shares rise more than five hundred per cent. The Shenzhen Index as a whole has doubled since January, and is up more than two hundred per cent in the past year. The action on China’s other major stock exchanges—in Shanghai and Hong Kong—hasn’t been quite as torrid, but they’ve had their share of extraordinary winners. The Shanghai Composite Index has risen a hundred and forty per cent since this time last year. In Hong Kong, Jicheng Umbrella Holdings (which makes, yes, umbrellas) went public in February: its shares are up almost seventeen hundred per cent.
Tyrone, Tyler’s evil twin, says buy, buy buy! Borrow to buy, and then borrow to borrow! Tyrone has read so many people in the last week calling the Chinese stock market a bubble, so the contrarian in him thinks you simply need to take the plunge as soon as possible.
Direct foreign investment has been allowed only as of late 2014:
The Shanghai-Hong Kong Stock Connect program will allow all investors to buy shares on the Shanghai Stock Exchange, while also permitting wealthy investors in mainland China to buy stocks listed in Hong Kong. The move allows investors access to companies with an overall market value of roughly $2 trillion.
“We think it is very significant. We plan to participate,” said Gary Greenberg, head of emerging markets at Hermes Investment Management in London, which managed $46.9 billion in assets as of June 30.
That’s a lot of foreign capital to push up the value of Ma and Pa Tofu, and indeed that flood of capital will validate your early investment. And who amongst us is not tempted to diversify just a wee bit into the world’s second largest economy, indeed the very largest by PPP measures? Surely the coming tidal wave of foreign liquidity will push aside all present minor worries.
On the domestic front, Chinese savings are currently real-estate intensive, and over time those funds be shifting into equities, especially as Chinese graduate students carry the lessons of Mehra and Prescott back home. As prices fluctuate, the market is assessing how significant these effects will be, just as it once did with subprime.
Besides, the market went up 4.6% on Monday alone, and that is at a time when Chinese manufacturing seems to be slowing. The Chinese government itself proclaimed the stock market to be “healthy,” and indeed many different parts of the government, including the media, have seconded this verdict. Why bet against all of them?
Did you not know that the Chinese debt-equity ratio is too high? Well, higher equity prices will help lower that ratio, as the government intends; new stock issues are being used to buy back corporate debt, some of it dollar-denominated.
If nothing else, return back to some patriotic context. Was it not a good idea to buy American stocks when our country had a per capita gdp of 6-7k, and headed up? With a 20-30 year time horizon, was it not a good idea to buy American stocks even in 1929?
To be sure, the forthcoming liquidity-based, foreign investor-driven price movements imply a non-horizontal demand curve for those stocks, and thus violate the stricter forms of EMH. But who said a demand curve should be perfectly flat anyway? Weren’t the Marxists referring to perfectly flat demand curves when they said competitive capitalism is the absolute loss of freedom? And hasn’t China been moving away from Marxism? Q.E.D. So Tyrone says it is time to borrow to buy. Someone out there — maybe even you — won’t regret it.