Taoyuan Nights

(picture liberated from the Xinhua ‘news’ service)

I’d like to draw your attention to this article. In it, the Times exposes a few more of the completely bonkers things that are happening right now in the PRC.

Some of my favourite quotes from the article:

“Trading hours coincided with my shift so I gave up my cab,” Lin Huaqiang, a driver, told a local reporter who discovered that more than 100 cabbies had followed his example.

Even schoolchildren given cash by relatives at this year’s spring festival have clubbed together to pile into investment funds.

Among them are eight members of a class in a Nanjing primary school. One of them is Xiao Yue, 9, who boasted that he had already made £66 profit on an investment of £1,300, concluding: “What fun”.

Another investor, Chen Ping, told how he, too, had raised a loan on his house for 300,000 yuan and put all the money into the market. “I believe there’s no risk,” he said.

The richest man in Asia, the Hong Kong tycoon Li Ka-shing, declared last week: “It must be a bubble.”

Shanghai-ers, I’ll be blunt. What you’re doing is batshit crazy. By this, I don’t mean the kind of crazy where you pull your T-shirt over your head, and run around in the middle of town all day, shouting “Wheee! I’m an aeroplane!!!”. Nor do I mean the kind of crazy where you grab a damp towel, and spend the whole day at the zoo, trying to sneak into the cages so that you can painfully towel-flick the lovespuds of the fiercest animals you can find. Nor even the kind of crazy that would make you enjoy playing Second Life all day….nope, not even that.

I’m talking here about the kind of crazy where you wake up one morning to find dolphins crawling out of the wall, and all the dolphins have flowers growing out of their eyes. The kind of flatout insanity where you genuinely believe people you meet are giant invisible fish that are trying to eat your soul.

That’s the kind of crazy you have to be, to put your money in the Shanghai Stock Exchange (SSE) right now. To know that around 400,000 people per day are signing Faustian Deals with the SSE - so that for a few days they can feel what it’s like to make money from thin air - is absolutely horrifying. This is going to end with decades of poverty for millions of families.

Consider this: nearly 10% of the entire Chinese population (i.e. nearly 2.5% of the entire world population) has been sucked into this one particular pyramid scheme in Shanghai already. The rate of growth in the number of investors is accelerating at breakneck speed - 15 times as fast as last year. Last month, more new Chinese stockbroking accounts were opened than in all of 2005+2006 put together. And the entirety of them seem to be people expecting that they will get rich from doing… nothing at all, besides quitting their jobs and sitting on their butts all day, watching numbers going up and down on a computer screen.

And 4 final thoughts…

• Turnover in the PRC on Wednesday exceeded that in every other market in Asia, put together. Who wins with turnover? Certainly not the little people. Turnover means ’shares being bought and sold’. In other words, it’s great for stockbroking companies, who make commission from each buy/sell. It’s great for the government’s tax coffers too, since usually a cut is taken for them too. Therefore, what has been set up here is a system which efficiently moves money from poor people to rich people and the government. Good old communism in action!
• The ‘real’ interest rate on savings that is driving the bubble: -3%. (i.e. real=gross rate - inflation)
• Current PER ratios in Shanghai: 50x-60x. Look at the graph below of PER ratios for the US market over the last 100 years or so. Notice the two spikes around the years 1930 and 2000? Notice that neither of them even got close to 50-60x, yet they marked the onset of a ‘generational’ crash in the markets and general economy, with an average of 70%-90% losses in equities, as well as massive unemployment, business failures…

  

  Graph by John Xenakis. Notice the peaks. Shanghai is so nuts, that it is already ‘off the scale’.

• If you are invested in Asian equities: BEWARE.

More news here, here, here and here.