After seven days of steady increases, on August 29, 2007, the Shanghai and Shenzhen Stock Markets, ended up at 5109 points. Since the end of July, the negative impact of the sub-prime mortgage loan crisis in the United States has caused global stock markets to fall.
Regardless of the rescue efforts of central banks around the world, the market value of major global stocks has lost US$2.66 trillion so far. The stock market in China, unlike the rest of the world, continues to hit record highs. Experts aren't sure whether it's a good sign or not.
Stock Market Rises in China But Falls Globally
On May 29, 2007, the Shanghai and Shenzhen Stock Markets lost US$350 billion as Beijing raised the stamp tax on stocks. During the following three months, the stock index continued to rise and new investors kept rolling in, making the stock market look even better. At closing on August 17, the total number of accounts in the two stock exchanges exceeded 114 million.
At 9:25 a.m. on August 23, 2007, the Shanghai Stock Market Composite Index started up high and concluded at a record high 5000 points. Beijing's official mouthpiece Xinhua News praised the stock market on its front page saying it is rational and listed many reasons why a market with 5000 points was healthier than with 1000 points. Then on August 29, 2007, the Shanghai Stock Market finished with 5109 points after maintaining a seven-day rise.
The Chinese market index increased 130% in 2006 and another 80% this year.
Why is China's stock market different from the rest of the world? Why don't China's real estate and stock market bubbles collapse after they skyrocket? What is so different about China's stock and real estate markets that make them work against global trends?
On August 22, 2007, Goldman Sachs claimed in one of its reports that the economy in China is no longer linked to that in the United States, which is reflected in three aspects- the two countries have (i) different economic growth models, (ii) different trends in interest rates, and (iii) different rates of exchange. The report predicts a slow down of the U.S. economy and the sub-prime mortgage loan crisis resulted in less external demand for China and happened to help China to relieve the pressure of overheating demand.
Is this correct?
The Worse the Investment Environment, the Higher the Stock Market Price
Not long ago, Professor Lang Xianping from China talked about what he thinks of the stock market at a conference in Hefei City, Anhui Province. In his view, "The worse the corruption and investment environment are in China, the higher stock prices and real estate values will shoot up."
Professor Lang analyzed the three characteristics of China's real estate market. First, two core resources — approval of land development and the accessibility of bank loans — are held in the hands of individual government officials. This allows for the possibility of abuse of power for private interest. Second, in the process from putting a house on the market to final sale, a realtor must obtain over 100 separate government approvals. Behind every approval, there is the possibility of corruption and hiking up the cost. Third, in order to have a higher GDP for job merit, local officials come up with every possible way to sell land and raise the price.
For an private entrepreneur, no matter how hard you work, your profit margin might be only five percent. If the rising exchange rate of the RMB is factored in, your final profit margin could be as low as two percent. On the contrary, if you bought a villa two years ago, in the blink of an eye, you earned 10 to 20 million yuan(1) (US$1.3 million to US$2.6 million). Facing such an investment environment, who would put their money into manufacturing?
Aside from the afore mentioned, China also has large sums of money, which Lang called "fake and corrupt capital," including money from corrupt dealings in officials' hands (corruption is very common in China), international hot money, and citizens' savings. Wherever the "fake and corrupt capital" flows, an economic bubble appears.
Lang also called the Chinese economy a "two element economy," real estate and its related industries are overheated, but other industries are stagnant. The communist regime's policy to increase the interest rate has had very little effect on the overheated real estate industry and in fact actually cools down other industries.
A large amount of capital has been misdirected to overheated industries, while there is a capital shortage in the over cooled industries. So the regime has no choice but to print more money, which means inflation.
In Lang's estimation, China's real estate and stock prices will continue to rise until the bubble bursts.
Beijing Olympics Becomes a Casino
Caoan Jushi, Vice Chairman and CEO of Pan-America Capital, Inc., said the communist regime made the Beijing Olympics a world-class casino. Because the Olympics is the most prestigious project ever for the regime, that means, before and during the Olympics, China must look good; including a prosperous stock market, a stable real estate market and the revalued China yuan Renminbi (RMB). It is like the regime guarantees prosperity, in the name of the Chinese government, international hot money has no worries of pushing the Chinese stock market or real estate market to record highs.
According to China's State Administration of Foreign Exchange and Ministry of Construction, every month, over US$130 billion covertly flows into China, out of the reach of the regime. Currently, about US$90.9 billion in hot money stays in the real estate market of big cities like Beijing, Shanghai, Guangzhou; and about US$38.9 billion stays in the real estate markets of provincial capital cities and coastal cities; with about US$19.4 billion remaining in moderately developed real estate markets and small cities such as Ningbo and Wenzhou.
Because of hot money, China's stock market keeps rising. Currently over 40 percent of the stocks in the market have a high price / earnings ratio of over 100, about 76 percent of the stocks have a price / earnings ratio of over 50, while the average price / earnings ratio in the international markets is below 20. Also, hot money causes very high inflation, when only calculating food products such as meat and eggs, China's retail prices have already exceeded the average retail prices in the United States.
A Forecast for the Future
According to Caoan Jushi, China's stock market could definitely exceed 8,000 points, but after the Beijing Olympics, overseas investment will leave swiftly, and China's economy will collapse. There will be nearly ten years of recession, and the economic growth accumulated by Chinese people during the past 30 years will vanish in the blink of an eye.
(1) Because of the large population and limited developable land, villas are a luxury item in China. Most of the rich can only afford to buy an apartment, In Beijing, the average villa price in May 2007 was 12,379 yuan (US$1,607) per square meter, a 38 percent increase compared to same period in 2006.
