dimanche 29 mars 2015

Chinese Investors should be cautious about market risks

Investors from China should be cautious about market risks,” the China Securities Regulatory Commission said on its microblog. “We shouldn’t be thinking if we don’t buy now, we will miss it.”
Chinese investors act as giddy as Americans were on December 5, 1996, the day Alan Greenspan made his famous "irrational exuberance" search on markets. Do not take my word for it. Here's what the securities regulator in the country said on Friday, the day of the Shanghai Composite Index rallied to its highest since May 2008:

Not much ambiguity there, and yet the Shanghai stocks rallied Monday at the head of their longest winning streak since 2007. What gives? Beijing made the same mistake Washington made 18 years ago-more and not clamping down on a stock market boom that is based more on leverage than reality.

Can sliding Greenspan Federal Reserve chairman on Wall Street was a foam without enthusiasm - so cryptic, in fact, that many senior journalists missed Fed. He came in the middle of a boring speech stultifying about the bubble of the 1980s in Japan. For a couple of days, markets quaked at the prospect that the Fed may cut short the ongoing event, which affected the astronomical valuations for startups dodgiest.

But Greenspan blew the final. Lawmakers were apoplectic over the actions targeting the Fed. Rather than hold his position, Greenspan shut up and evolved. If the Fed had repressed stronger in the 1990s - say with strict margin requirements - a Nasdaq accident could have been avoided. Investors could have been punished less likely to overleverage in the decade that followed. In Beijing, the governor of the central bank Zhou Xiaochuan can not afford to make the same mistake.

Chinese growth slows

The economic fundamentals do not drive this rally - political expediency is. Chinese growth slows - an early indicator of factory activity rose to a 11-month low in March - Beijing clamping down on credit and real estate market that seemed unstoppable once is in shock. This leaves room for China to satisfy their desire to get rich quick: actions. And recent policy tweaks are helping. In September, China has reduced costs by more than half for individuals and institutions to open share accounts. At the same time, the futures market has reduced the margin requirements for equity index contracts. Last month, it cut the amount of cash banks must hold loans by 50 basis points to 19.5 percent.

Not surprisingly, the outstanding value of margin trading or shares purchased with money borrowed on the Shanghai Stock Exchange rose to a record $ 158 billion in March 20. In fact, it was hitting new highs almost daily for weeks. In the finished March 6th week, mainland investors opened 662,000 new accounts to buy shares, the most since December, when the gauge Shanghai jumped 21 percent.

Obviously, a number of fast-growing Chinese buy for fear of missing out on the boom. With $ 3.8 trillion foreign exchange reserves, China can always bail out the market if an accident occurs. But before long, in addition to maintaining economic growth in the short 7 percent, the government will be shoring stocks, companies default on the stock of dollar-denominated loans (real estate developer Kaisa can be the first one) and suddenly public enterprises hungry liquidity. Intelligent Zhou and President Xi Jinping are is a lot to plug leaks at a time when they are also switching engines of growth in investment and exports of services.
The authorities need to crack down more forcefully on margin loans. The CSRC has been ignored once. A sinister coincidence, his earlier warning came on December 5, 18 years to the day Greenspan made his first sentence signature. China's regulator warned that stock prices for some listed companies were "relatively high" and that "there are about 700 companies in the stock exchanges in Shanghai and Shenzhen with a price-earnings ratio of more than 100." Three days later, investors have pushed the Shanghai Composite up 2.8 percent to over 3000. Today, it is 25 percent higher than it was on 5 December.
There are some plausible explanations why so many investors could leave logic at the door. First, the potential of the middle class in China and hopes for several initial public offerings blockbusters like Alibaba are overshadowing worries about deflation. Second, Beijing had until recently been directing its 1.3 billion pile savings in shares to support the market. Third, there is a genuine optimism that China is serious about transforming its economy.

But policymakers will regret willingly orchestrating this bubble. Making it easier for tens of thousands of small investors to bet on stocks to turn against terribly if the economic fundamentals do not begin to validate the exuberance of the market, and fast.

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