The Chinese Stock Bubble: Watch For "Critical Level Around July 17-27, 2009"

Tyler Durden's picture

Expanding on Cornelius' early piece on China, here is an analysis out of some BNP quants who for one reason or another are convinced the end's in sight. For those who are forgot where they put their Ritalin, here is the punchline:

"By the very nature of the model, this result gives us two conclusions. Firstly, there exists a bubble in the Shanghai Composite Index. Secondly, it will reach a critical level around July 17-27, 2009. This will lead to a change in regime which may be a crash or a more gently bubble deflation. An extended version of this note, with a careful assessment of the confidence intervals and comparisons with the previous Chinese bubble ending in Oct. 2007, will be released soon." 

h/t Jeff

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Quantum Noise's picture

These suckers should not use the words "a change in regime" when it comes to authoritarian regimes. Other than that, I got the popcorn ready. If the French are right, that will be fun. If not, what the heck, who said the French shouldn't have their own Dick Bove.

dza's picture

isn't Bove a French Bove? Is a Bove by any other name a Bove?

Comrade de Chaos's picture

there will be a sign.. Small and insignificant sign at first will be rejected by majority. It could be a small bank or medium RE developer default, there will be plenty of denial. Unusual degree of denial by public leaders and local business officials, should be a good sign to get the party started. Prior to that, it's like stopping a bullet train, you know it will derail, however you also know  it will keep moving for a while due to inertia. All I am saying, monitoring sentiment & news coverage might be more useful than TECH/STAT model in this case. 

Is there a place where one can dig the statistic on how many times CHINA was mentioned on CNBC & BBC?  :)


Miles Kendig's picture

And the hits just keep on rolling

Gunther's picture

They claim a bubble but state that the path after the top is unknown.

In more common words they call a top and after that stocks might stay flat or go down.

That sounds way less alaming.

Anonymous's picture

Bob Farrel's rule number (4): Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Shaza's picture
Shaza (not verified) Jul 14, 2009 2:56 AM

Just glad I sold my Asia Ex-Japan  Fund on Monday! Hope this date is right!  

Main thing was I captured good divs and the Indian stock market pop post elections! I will miss those days of EZ money! :(

Shaza's picture
Shaza (not verified) Jul 14, 2009 3:01 AM

TD, could you kindly post the 'extended version of this note' that he alludes to in the conclusion when it comes out. Many thanks, I will feel like a genius if that date is right as sold Platinum Asia ex Japan on Monday Aussie time! 


hardball22's picture

China had such an advantage entering this global downturn: seemingly bottomless, untapped demand in the millions of consumers in rural China.  With a huge budget surplus & current acct surplus, why wouldn't China invest in infrastructure to reel in that demand?  There's so much to undeveloped rural China, the modernization of which is an investment rearing constructive return.

Further, could China's investment in raw materials be a means to that end?  Could all their iron ore stockpiling, et al be a stab at capturing cheap commodities within their boarders for future processing?  Maybe the govt has greased the wheels for private consumers/speculators to secure these commodities (and lever up w commodity-backed loans) because they just want them on Chinese soil.  Trade barriers can keep them within Chinese boarders, plus the government could direct purchase them from its people.

Chinese refineries can process these materials; Chinese public works and private contracters can plug them in, to bring roads & industry to rural China.

China tapping its local demand was originally a taboo, protectionist recommendation, but the globe was moving toward protectionism naturally.  Giving the consumer a loan collateralized by a commodity is reckless.  They apparently missed the global credit crisis.  Methinks they misstepped there, but couldn't this stockpiling be a piece in the larger puzzle?

HEHEHE's picture

For what it is worth FXP volume has increased significantly the past few days.

Anonymous's picture

Apparently about a fifth of those loans issued this year, meaning about $170 billion, was put into the stock market. This is just like what happened in the 1920's in the U.S. I'd wager China will stop trying to keep their economy out of a contraction and focus instead on placating the people with ramped-up political reforms.

Anonymous's picture

"China had such an advantage entering this global downturn: seemingly bottomless, untapped demand in the millions of consumers in rural China."

a Question, do consumers in RURAL China have financial resources to satisfy their demand?

hardball22's picture

According to Citi Investment Research Nov 1 2009 report (take it for what it's worth): 25% of Chinese use toilets.

To answer your question, no, they don't have the resources.  But the government has piled up a surplus for a rainy day.  It will never be an emergED market until per capita income is respectful.  If you're the Chinese government atop a hybrid capitalist/centrally planned economy, you're looking for a way to prop up demand until the rest of the global economy has nursed its wounds. China can invest a part of its surplus in its un[der]developed rural geographies.  Bring industry & business neigh and income will flow--specifically in the Chinese case, where there are these pockets of untapped demand.

It's quite the opposite of the matured, saturated American economy.  It's a far cry from a normal emerging market that's so dependent on the performance (and credit) of developed markets.

China's a creditor with a hard-on for exports.  If the big-bad-west sways toward protectionism, that give you an excuse to turn domestic to replace that foreign demand. (Did anyone here notice the trade agreement with HK last week? Trade to be settled in RMB? May be old news for some.)

In the end, no, RURAL China doesn't have the financial resources... but given their economic model, the Chinese government would be well advised to provide those resources.

Anonymous's picture

When I hear most of comments on CHinese demand, I automatically hear RE prices never go down.
1) You can not view them from our perspective, just look at the average CHinese salary of a migrant worker (rural China), is it a = 40K; b = 20K; c =5K? Why do the most of world large corporation outsources their manufacturing there, wasn't it a cheap labor? Therefore the answer is c.
2) Than look at the inequality in China, according to the latest data inequality there is higher than in the most of developed countries. Which means that top 0.1%, plus middle up of 1% of the population, plus the Communist party controls most of the wealth. As the result, your rural salary goes down to 2.5K.
3) Have the rural workers been able to make those 2.5K or equivalent during the last a=10 years; b= 20 years; c = 30 years? Have you ever seen a picture of hungry children on the TV? Well, believe it or not 30 years ago the large part of rural China did experience some form of hunger. 15 years ago they did not have markets or any assets that could pay you any decent % return. So why would someone who gets only 2.5K a year and had an ability to really save any meaningful amount of money in the last 10 years would spend an annual salary on the big screen TV or some fancy washing machine, etc? Especially why would they spend their savings if they already have cheaper alternatives and they do remember being hungry. When you experience the real hardship, you will always keep some resources under your "mattress" (just ask someone who lived through the great depression.) So why would all of the sudden those people rush to spend their little (compared to the western standards) savings they have?
4) Now huge accumulator of total savings and wealth in China is the communist party. One of the reason they accumulated so much is because they didn't spend much for people (so much for socialism, huh.) Does you average Chinese have the free medical care, granted vacation and some other benefits that USSR citizens used to have. Well, it might be not obvious, however if you would watch any western documentary on CHina the answer is NO. CHinese party spend money strictly infrastructure in certain areas, army, some(!!!) education and Export Subsidies for chosen (connected) citizens.
5) Can Chinese communist party efficiently distribute money among CHinese citizens overnight (if at all) to bump up the demand? Well, imagine well connected firm GS. Imagine that majority of the people there work because their Ivy League connections ONLY (talent & being smart do not matter). Multiply this supposed firm by a million, that's the communist party. Boss in the center distributes the stimulus, that goes to the bosses in a hundred or so divisions (80% remains), that stimulus past to the subdivisions of those divisions (60% remains), the reminder is passed to the local well connected businesses (40% remains) which in turn use it to pass to their workers through wages__NOT, they pass it into RE and stock market speculation. My point is that, even when one Central boss tries to put some stimulus to increase the demand, the lower rank bosses might have different agendas. That's what the Communist Party is.
So, is there any significant rural consumer demand in China? Is the fascination of our media with CHina based on any fundamentals or structural analysis?
Well, each should answer that question individually.
p.s. sorry for spelling & similar, it's late, etc.

Anonymous's picture

China is rumored to have plowed MORE THAN HALF of all lending since January back into stock market speculation.

If so, the collapse over there if a selloff gets going will be EPIC - there is no margin there, so the loans will blow up at the bank level, and there is no "margin call liquidation" for brokers to use to stop the meltdown.