Why China Couldn't Care Less About Its Stock Market

Tyler Durden's picture

Following the latest liquidity injections by the PBOC (set to make 2014 the biggest credit creation year since Lehman), countless bailouts of insolvent companies by Beijing and local governments despite promises there would be no bailouts, and what some have dubbed is an actual Chinese QE, all making it quite clear that China was clearly not serious when it threatened to burst the housing bubble (it hoped it could do a "controlled landing"; it failed which means full steam ahead onto the inevitable NPL collapse), Chinese stocks have clearly responded by jumping higher with the Shanghai Composite spiking to its highest in 7 months.

This in turn has brought the permabullish Chinese penguins out of hiding, who, having been wrong on the Shanghai Composite for 6 years, now see a sudden resurgence in the Chinese stock market. Their thinking is predictable: like the US stock market is to the Fed's "wealth effect", so China's would be to the PBOC, right?

Wrong.

The reason: while in the US the bulk of America's $67 trillion in household wealth is in financial assets, read the S&P 500, with only 28% of wealth invested in real estate (according to the latest Flow of Funds reports), in China the wealth distribution is a mirror image, with a negligible amount of wealth invested in stocks and the bulk of household wealth invested in real estate. By bulk we mean a whopping 75%!

From Xinhua:

About one percent of Chinese households own one-third of the nation's wealth, raising concerns about income inequality in the world's most populous country, according to a study by Peking University.

 

Chinese households on average had a net worth of 439,000 yuan (about 71,000 U.S. dollars) in 2012, up 17 percent from the 2010 level, the university's Institute of Social Science Survey said Friday in its latest report on China's livelihood development.

 

However, income inequality rose rapidly during the period, the report said, as the top one percent of Chinese households held more than one-third of the nation's wealth, while 25 percent of households at the bottom owned only 10 percent of the country's property value.

 

The researchers based their main analysis on 2012 data from the China Family Panel Studies, a large-scale survey project conducted by the institute.

 

The report showed about 74.7 percent of Chinese household wealth came from owning real estate.

Which confirms what we have been saying for years namely that "to China housing is like the stock market to the US: both mission-critical bubbles designed to give a sense of comfort and boost the "wealth effect"."

The allocation of household wealth to real estate is shown in the chart below, but the message is clear: when it comes to chasing China's latest and greatest bubble reflation, focus on real estate; nobody cares about Chinese stocks.

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Kirk2NCC1701's picture

They're not the only ones.  Same here.

Thanks to infallible advice from ZH, I haven't been in the stock market for over a year, and have thus avoided the dangers of the Wealth Effect.  Gold, baby!

wallstreetaposteriori's picture

If you dont already own 3 chinese ghost properties you dont own shit... its all the rage playa's

Vampyroteuthis infernalis's picture

It is all a pyramid of promises that will never be paid. In the end the same result, collapse.

Freddie's picture

I need to buy more real estate.   I was thinking of doing some condo flips in Chinese ghost towns.

jmcadg's picture

Difference being, most Chinese live in a house, most Americans don't own stocks!

tickhound's picture

So here, a levered call gets me a piece of paper. There, a levered loan gets me something real with windows and an alley view. Hmmm.

LawsofPhysics's picture

Yes, but what you need to really ask is "which of these forms of wealth is easier to steal".

 

I'd argue that electronic 401k/pension can be taken considerably easier/quicker.

Postal's picture

Let the local Barney Fife "suspect" that the plant in your kitchen window is illegal and see how fast he'll steal your house.

LawsofPhysics's picture

You fail to recognize one important concept.  I know my local "Barney Fife".  I know were he lives, where his children go to school.  Same thing goes for all my local "representation".

Try again.  At the end of the day, all economies are really local.

Dr. Engali's picture

Here we have another battle between tangibles in the east and paper in the west.

AdvancingTime's picture

I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large  percentage of wealth into intangible products or goods. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.

 It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it  leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.

http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

LMLP's picture

Hey whitey, fanks for da land and genelations of income!

You take green paper and move along now. 

 

Hokay!

mastersnark's picture

Just how Chairman Mao planned it...

NOZZLE's picture

I had a Chinese client once, a female in her 50's constantly buying and selling residential real estate.  Every closing where she was buying (on credit) there was copy of her credit report in the closing packet, the only consitent trend I noticed was that as the amount of money she was making on flipping was increasing, her oustanding credit card debt was increasing by a factor of 1.5.

Took Red Pill's picture

How much of that real estate that the Chinese own is in the U.S.?

q99x2's picture

The NWO gives equities to Americans, Homes to the Chinese and Ebola to Arricans.

orangegeek's picture

Chinese roots come from owning land - this may sound odd, but in Fairbanks book, China - A New History, it explains why China, in 1776 with 110M people, was out done by the US (8M in 1776) by the 1950s.

 

Europe stole (rip off taxes) from there merchants and fed their royalty with it.

 

The US was where mercantilism took hold and thrived.

 

The shanghai index is currently at 2200 (sharp up moves recently) - its all time highs in 2007 was 6100.

Itchy and Scratchy's picture

Central Banking types & Regulators aren't suppose to care about stock markets or asset valuations like they do now!

 

That is the job of free and open markets to do!

IllusionOfChoice's picture

I am struck by the reported figure here that Chinese household net worth is at $71,000 and US 2013 household net worth was at $56,335 down from $87,992 in 2003. (http://www.nytimes.com/2014/07/27/business/the-typical-household-now-wor...)

Shouldn't we be talking more about this? For all the talk about China as a rising economic power, they are already wealthier than the US on the household net worth metric. The US has already lost and it will continue to get worse as more wage monies migrate that direction in the great leveling.

Someone please let me know if I'm not understanding this correctly. All I can think of is that there may be more people in a Chinese household than a US one...but does it matter?

AdvancingTime's picture

The worth is based on trumped up and massivly overvalued housing prices. When these prices fall much of that "worth" will vanish. The debate continues as to how stable china really is. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system.

This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on. Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html

turnoffthewater's picture

What the author didn't say is there are no capital gains paid once the property is sold. And there are what 1.2 billion people?