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A Tale Of Two Bubbles: China vs Nasdaq

Tyler Durden's picture




 

Following two days of soaring volatility in China's stocks, when last night we saw both Shanghai and Shenzhen pulling back into an official 10% correction before some dip-buying later on, comparisons have again emerged about the eerie similarities between the Nasdaq and the Chinese Shanghai Composite, a comparison we did over a month ago...

 

... and a comparison which China's habitual gamblers:

 

... promptly ignored, sending the Shenzen soaring to ridiculous levels:

 

... until last night's correction.

 

So, courtesy of Deutsche Bank, here is yet another comparison, showing that when it comes to the Chinese stock juggernaut, not even the first Nasdaq bubble can hold a candle to the sheer mania sweeping Shanghai and Shenzhen:

  • Chinese moves have been steeper than the ascent in the NASDAQ 15-16 years ago.
  • For example after the recovery from the LTCM/Russia 1998 mini collapse, the NASDAQ took 322 business days to move from 2000 to the peak of 5048 in March 2000 which is around 150% price appreciation.
  • The Shanghai has recently taken 291 business days to move from under 2000 for the last time to 4942 on Tuesday - a similar move of just under 150%.
  • The last 150% rise in the Shenzhen (to Tuesday's peak) has taken place since 8/8/14 - in just 194 business days.
  • DB China equity research has shown that of the 77% who report quarterly earnings in the MSCI China index, they have collectively seen a -3.2% YoY earnings contraction in Q1

 

Of course, manias end just as fast as they started, and with far more tears.

Food for thought as fundamentals and valuations have been dramatically diverging, and one final observation: DB concludes with the following "fascinating statistic", namely that turnover (Bloomberg) on the two China bourses discussed above was at a record $380bn on Thursday surpassing the $248bn on US stock exchanges and just under $9bn in the UK.

So for all those curious where the US "volume" has gone? Look no further than China.

In other words, in China "everyone" is now all in. What happens when "everyone" sells at the same time?

 

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Fri, 05/29/2015 - 11:40 | 6143904 nuubee
nuubee's picture

Casino's never let everyone cash out at the same time. They just close the cashier and give everyone a complementary suite for the night. Sleep tight.

Fri, 05/29/2015 - 11:50 | 6143935 The_Dude
The_Dude's picture

Chinese lluuuuuuuuuvvvvv to gamble!!!  But they too will learn the house always wins..

Fri, 05/29/2015 - 12:09 | 6143991 Dubaibanker
Dubaibanker's picture

< Chinese companies are profitable & consumption is rising rapidly instead of reliance on exports. They will keep rising.

< Chinese are doomed to fail like the Nasdaq.

Fri, 05/29/2015 - 13:16 | 6144245 Bananamerican
Bananamerican's picture

No one does Apeshit like the ChiComs

Fri, 05/29/2015 - 12:04 | 6144000 Captain Debtcrash
Captain Debtcrash's picture

Great comparison! Where’s all of this wonderful long term central planning the Chinese are going to use to wipe the floor with the west? Not that the west isn’t blowing bubbles but this is in the stratosphere, and won’t end well.

Fri, 05/29/2015 - 12:29 | 6144090 Dindu Nuffins
Dindu Nuffins's picture

As a wise old China watcher, let me assure you that these banana merchants are long-term thinkers with a patient strategic plan, who plan to buy and hold for the next 5000 years of history. 

Fri, 05/29/2015 - 11:54 | 6143952 aurum4040
aurum4040's picture

Difference is they are front running the IMF SDR meeting in October and once the renmibi is in the SDR basket (at the very least) the bubble you see now will be reality through forex lenses. 

Fri, 05/29/2015 - 11:42 | 6143908 CitizenPete
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So short the Chinese stock Index if you want to bet against half a billion "aunties" and a GOVERNMENT run PBOC central bank. 

We have not begun to print!

Fri, 05/29/2015 - 11:43 | 6143910 NoDebt
NoDebt's picture

"Grandfather, I have brought much shame to the family.  I have gambled with the money it took your whole life to save."

"How much of it did you lose?"

"Not sure.  What time is it?"

- Future conversation somewhere in China

Fri, 05/29/2015 - 11:49 | 6143933 KnuckleDragger-X
KnuckleDragger-X's picture

The E-trade baby is now Chinese......

Fri, 05/29/2015 - 15:50 | 6144823 Citxmech
Citxmech's picture

Aaaaaaand it's gone.

Fri, 05/29/2015 - 11:52 | 6143941 Pareto
Pareto's picture

+100 for "Not sure.  What time is it?" he he hee

Fri, 05/29/2015 - 11:45 | 6143919 max2205
max2205's picture

It pays when the people follow the govt wishes.....oh and have money slash margin

 

Come on all you EBTers in Baltimore and Detroit open a margin account and trade.

 

 

Fri, 05/29/2015 - 11:47 | 6143927 lordbyroniv
lordbyroniv's picture

f china

Fri, 05/29/2015 - 11:52 | 6143938 Dr. Engali
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"In other words, in China "everyone" is now all in. What happens when "everyone" sells at the same time?"

 

Simple, selling will be banned.

Fri, 05/29/2015 - 11:57 | 6143971 taketheredpill
taketheredpill's picture

 

 

Picture # 2:  And that is why your investments are now worth less than the Ginsing Energy Drink I am holding in my hand.  

Fri, 05/29/2015 - 12:01 | 6143989 taketheredpill
taketheredpill's picture

 

 

If/when this implodes maybe consider buying Yanjing.  Those folks will want to drink a LOT.

 

Fri, 05/29/2015 - 12:12 | 6144015 Consuelo
Consuelo's picture

Economies-of-scale.  4X the population.

 

Fri, 05/29/2015 - 12:17 | 6144038 Tyler Durden
Tyler Durden's picture

Cash flows of scale: 0.25x

Fri, 05/29/2015 - 12:17 | 6144032 NeverForgetSilver
NeverForgetSilver's picture

You can compare whatever way you want but you have to adjust the timeline to make the comparison look right. This is fruitless.

The fact is that Chinese government has been suppressing their stock market to discourage gambling and forcing people to reinvest on real economy for many years, at least since 2007. Now they allowed the stock markeyt to rise to combat US engineered global capital flow. US has been promoting conflicts and attract capital from the world using a reason called safe haven. Now Chinese housing market is topping and capital might start to flow out of China. This includes foreign and domestic capital. The rising stock market has an effect of anchoring the capital or even attracting them back to China. Anyone see this?

 

Fri, 05/29/2015 - 12:21 | 6144056 Tyler Durden
Tyler Durden's picture

Actually, no. What is happenening as we explained earlier this week in "Why China Is So Desperate To Blow The Most Epic Stock Bubble", is that having smothered its shadow banking, China is desperate to blow the equity bubble in hopes of shifting capital formation from debt to equity (and many other reasons).

The problem is equities are open to far more participants than mere trusts, which is why the stock bubble will blow out much faster as everyone even the banana stand guy jumps in, peak, crash and lead to a far worse outcome than had China persisted with merely capital misallocation through debt and NPLs.

Fri, 05/29/2015 - 12:39 | 6144126 NeverForgetSilver
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Sorry, this is a total misjudgment. Chinese are famous for saving and not comfortable with debt, just look at their 4 trillion foreign reserve. People saved up to 40% of their earnings in the last two decades. Chinese stock market has been in a state of depression for decades except short periods even as Chinese economy grew by an order of magnitude. Chinese premier Wen ordered the crackdown on their stock market in 2007. People were totally discouraged until late last year. There were plenty of jokes making fun of desperate investors, some are pretty funny. There was no desperation when I was there last month. People start to reluctantly entertaining stock market just now. Most people are definitely not in.

I find people use North American mindset to judge China and totally ignored culture and economic development factors. How can we be right? Have the predictions about China been all wrong so far?

Fri, 05/29/2015 - 14:05 | 6144424 Dindu Nuffins
Dindu Nuffins's picture

Famous for saving? Not comfortable with debt?

Hardly.

Chinese love debt, and they love conspicuous consumption and flaunting status. I've lived in China more years than I care to admit, and all the people I know want to ask me for loans. I suppose I could have become a shadow-banking node if I had agreed to them all!

What you really mean is that Chinese don't trust other Chinese in general to follow their agreements. Creditors generally don't trust repayment if the debtor is outside the guanxi circle, so the down payments on houses are set high, and the collateral and interest rates for loans are also high. 

Yeah, it's funny, but that kinda does have an odd way of depressing the enthusiasm for borrowing, but it is not cultural and mystical and hokey "Confucius-say" orientalism that cause it all. And it's not an innate love of monetary restraint.

It's just economic sense in a low trust environment. High collateral demands, high rates, low amounts of loans on the books. Simple.

Inside the guanxi circle, however, you routinely get asked for a little money to spot their son's wedding costs.

Weddings. That's the elephant in the room. It's not that people love saving, but if you're actually hobnobbing with down-to-earth types, then you know that money is being saved for one purpose alone: buying the bride-price (you pay the dad money for the girl) and the house and the car for all their sons. It  needs to be there when they reach marriage age. This is obligatory to getting married, and getting married is something you do at age 27 or face being shut-out as a "remaining one." Marriage is far more integral to being successful than America. This is a big deal.

In rural Shanxi alone, the costs can be $100,000 for all thee things. It's not that they want to save for saving's sake, just to hoard money for the love of it. Would they take debts? Yep. Do banks trust average Chinese not to default? No.

Would they gamble on a "sure thing" to get this money qucker? Yeah. Can't go to a restaurant without seeing groups of businessmen playing dice in their rattling cups.

I can tell you that I personally know a guy who was wiped out to the tune of  60000 RMB on silver (he won't ever forget silver, trust me) in 2011 (Chinese bidders like him were the culprit for that bubble) and is back at it without shame in equities now.

 

Fri, 05/29/2015 - 15:08 | 6144678 NeverForgetSilver
NeverForgetSilver's picture

I believe what you said is true but it does not contradict with what I said. The high savings rate and low borrowing is a result of low trust and low confidence. So it is not a con game like here YET. People are mostly involved in productive activities. I know quite a few people in China and all of them have paid off houses and big savings relative to their salaries. I just cannot see this kind of system collapsing under debt.  

Also I am not saying Chinese stock market cannot crash. When government feels that there is no threat of capital flow, they will make it deline gradually.

Fri, 05/29/2015 - 16:09 | 6144911 NeverForgetSilver
NeverForgetSilver's picture

BTW, if you want to know whether Chinese like savings/debts or not, simply ask the Chinese immigrants around you. I for one know that they have a lot higher savings and less debt than average white folks, especially blacks. Then your sampling makes sense since you put everyone in the same environment. The guys who asked you for loans probably had no intention to pay you back. They asked me too. However if they borrow from banks, they have to pay it back. If they borrow from loan sharks, they’d better hide if they default.

 

Sat, 05/30/2015 - 00:05 | 6146162 Dindu Nuffins
Dindu Nuffins's picture

I don't live next to Chinese immigrants, those aren't even real Chinese. I'm literally typing this is a small town in Shanxi province.

Chinese immigrants, strictly speaking, are not Chinese anymore, and even more certainly, they are selection-biased to be savers... they afforded a trip to America, and probably an education and a successful business to fund it all. That requires savings. Selection bias.

You learn nothing about mainstream ordinary China from those that can leave it.

Sat, 05/30/2015 - 11:19 | 6146815 NeverForgetSilver
NeverForgetSilver's picture

You live in one of the poorest provinces. But i remember people there are famous for saving as well as stinginess. I have been there a couple of times. If I am not mistaken, a lot of rich guys there save up a lot and buy houses in big cities. Saving is relative term. That is why you compare to income. Enjoy your village living.

Fri, 05/29/2015 - 12:37 | 6144115 Spungo
Spungo's picture

I feel a lot safer with the idea that Chinese are just as retarded as Americans. 

Fri, 05/29/2015 - 12:39 | 6144124 adventure007
adventure007's picture

1. You cannot short stocks in China

2. You cannot buy and sell the same day

These are 2 rules when trading stocks in China :)

 

Fri, 05/29/2015 - 14:34 | 6144539 Smiddywesson
Smiddywesson's picture

nm

Fri, 05/29/2015 - 12:53 | 6144181 Q-Q-Q
Q-Q-Q's picture

Surely the Fed can step in and cover any losses..................that's what they do.

Fri, 05/29/2015 - 13:38 | 6144323 1stepcloser
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we're ronna ruck some rolks

Fri, 05/29/2015 - 14:25 | 6144502 Smiddywesson
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Some things in trading change, but the parabola rule never changes: Win with a parabola, lose with a parabola.

Fri, 05/29/2015 - 14:59 | 6144653 reader2010
reader2010's picture

Between 2009 and 2012, China issued the same amount of money supply as it had done between 1978 and 2008. "You've got to dance while the music is still playing."

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