This page has been archived and commenting is disabled.

"Greed Is King" - What We Learned Talking To Chinese Stock Investors

Tyler Durden's picture




 

Authored by J.J. Zhang, originally posted at MarketWatch.com,

Though Greece has dominated the news recently, its overall market impact has been surprisingly muted. Instead, the real market mover and shaker for the last couple of months has been China.

By now, many are familiar with the facts and numbers of the Shanghai market situation. But recent events have also shed a light on a less well known dynamic — the individual behavioral habits and viewpoints of Chinese market participants.

During a short stay in Shanghai a few weeks ago on unrelated business, I had an opportunity to witness the ground zero of the China market frenzy at its peak and its nascent plunge. Chinese retail investors make up 85% of the market, a far cry from the U.S. where retail investors own less than 30% of equities and make up less than 2% of NYSE trading volume for listed firms in 2009.

Combined with the highest trading frequencies in the world and one of the lowest educational levels, describing China’s market as immature is an understatement. As many readers know, mental irrationality is often cited as the No. 1 cause of poor returns.

Using the opportunity to interview some China market participants, both in Shanghai and elsewhere, here are a few observations of how they think and act — and the potential lessons that await.

Bubbles can be surprisingly predictable

During the housing bubble run-up and subsequent recriminations, a common excuse was the impossibility of predicting and diagnosing bubbles. However, bubbles can often be characterized by several irrational behaviors and metrics and the recent China bubble is no exception. Almost everyone in the financial industry knew the Shanghai market was in a bubble. Interestingly, from my interviews with everyday participants, they knew it as well, many agreed that the market was crazy and was likely in a bubble. It was not a question of if, but when, the bubble would pop.

Chasing bubbles in China isn’t new

An interesting counterpoint to the bubble awareness is that, frankly, Chinese participants are used to chasing bubbles. Whether a cultural phenomenon or something else, over the last decade there’s been a continual hopping of investment from one big money-making scheme to the next. Whether it was real estate a decade ago, gold half a decade ago or wealth-management products a few years ago, there’s a continual cycle of money rotation into the “hot” investment, with each failing eventually in some way. It’s simply stock’s turn. As one interviewee said: “The Chinese market is not for investing, it’s for gambling.”

Early birds get the worms

This goes completely against most prudent and established norms. While the standard advice is to avoid “hot” bubbly assets, in China the experience has actually been to jump in early and fully instead. Many of the bubbles or “hot” investments mentioned earlier have in truth made many of the people I’ve talked to a lot of money. China real estate today is a poor investment but those who got in early doubled or tripled their investments. Similarly with wealth-management products, more people have benefited from their high-interest-rate payouts than have suffered. While the Shanghai market has dropped 20%-30% from its peak a few weeks ago, it still represents a 100% gain from a year ago and a 30% gain over the last 6 months. Those participants who jumped in early are still more than happy.

Greed is king

Despite recognizing it’s a bubble, almost everyone was still all-in on stocks. Why? Quite simply — greed with a dash of jealously. Seeing constant market gains in the news along with daily sharing and boasting from friends and family getting rich is simply too tempting and thus caution was thrown to the winds. Subsequently, this fueled a massive amount of equity exposure followed by leveraging and margin borrowing to go even more all-in.

But fear is the emperor

The only emotion more powerful than greed is fear. Almost everyone I talked to was still all-in on stocks but everyone had a foot halfway out the door, ready to bolt at the first sign of trouble. While not uniquely a China problem — market drops are almost always more violent than the initial rise — in China, it’s several times more volatile. Look no further than solar-panel firm Hanergy’s Hong Kong listed stock, which lost 47% in one hour, or the numerous days the Shanghai market rose or dropped by 5% or more.

Moral hazard in government rescues is real

During the most chaotic moments of the financial crisis, bailout discussions always raised the specter of moral hazard. While it didn’t play a major role in the subsequent U.S. recovery, moral hazard in China is fast becoming a deep problem. Many market participants I talked to said they were confident in the Chinese government to step in eventually to maintain order and prevent mass panic. They know the government’s legitimacy relies heavily on economic progress and fear any contraction. So far, they’ve been right — the government has announced a never-ending stream of interventions over the last few weeks to stem the selloff and panic, with the latest being the implementation of a half-trillion-yuan fund to purchase stock and shore up the market. Of course, the question is: When does a problem become too big for the government to control?

Maturity takes time

Perhaps the last lesson I took away from my Shanghai experience: Maturity takes time. Just as kids grow from naïve adolescence to rowdy teenage years to eventual maturity, so will China and its market participants. While stocks have been a part of U.S. culture and wealth creation for several generations now, in China this is really the first generation where participants both have the money and the ability to invest in stocks.

Perhaps in another generation, after several years of painful lessons and surprising opportunities, it’ll look completely different.

*  *  *

[ZH: Just like US investors have learned...

]

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 07/30/2015 - 21:07 | 6373530 Cognitive Dissonance
Cognitive Dissonance's picture

"Combined with the highest trading frequencies in the world and one of the lowest educational levels, describing China’s market as immature is an understatement. As many readers know, mental irrationality is often cited as the No. 1 cause of poor returns."

I'm not sure if quickly losing faith in the markets and the state should be considered 'immature'.

Thu, 07/30/2015 - 22:01 | 6373716 El Oregonian
El Oregonian's picture

We Tu Hi, and Sum Ting Bad, have decided to pull out and re-invest their losses in negative T-Bills... Because Confucius say: "Better to lose income than to capitalize outgo" - Bernankeshito

Thu, 07/30/2015 - 22:18 | 6373740 Dindu Nuffins
Dindu Nuffins's picture

From the article: "Chasing bubbles in China isn't new... Whether it was real estate a decade ago, gold half a decade ago or wealth-management products a few years ago, there’s a continual cycle of money rotation into the “hot” investment, with each failing eventually in some way.

And the gold bubble, too, will continue popping thanks to the Chinese speculators who ate the lunch of many anti-fiat boosters. It's still a long way to $850. 

Thu, 07/30/2015 - 23:05 | 6373894 lasvegaspersona
lasvegaspersona's picture

You're thinking of the other China

Thu, 07/30/2015 - 21:07 | 6373531 summerof71
summerof71's picture

I went to Hong Kong once. Everyone spoke incredibly poorly about the mainland Chinese people. The most common adjective used was "stupid" followed by "uneducated," aka perfect fodder for the banksters.

Thu, 07/30/2015 - 21:09 | 6373541 booboo
booboo's picture

Fu Tu Hi Bang Da Head Ho Li Fuk Me So Fuk

Thu, 07/30/2015 - 21:14 | 6373559 starman
starman's picture

Think Chinese people think Chinese!  

1.3 billion vs 320 million! 

Thu, 07/30/2015 - 21:21 | 6373579 Peter Pan
Peter Pan's picture

I subscribe to that old saying that greed feeds it on the way up and fear drives it on the way down.

Thu, 07/30/2015 - 21:32 | 6373586 Atomizer
Atomizer's picture

Old battle, Semi-Periphery state over taking the Core state.   

Thu, 07/30/2015 - 21:29 | 6373610 Atomizer
Thu, 07/30/2015 - 21:38 | 6373651 bid the soldier...
bid the soldiers shoot's picture

Confucius say "With Chinese greed you get greedy one hour later.  With American greed you greedy your whole life."

Greed and fear - two intrinsic emotional states relating to the topic of unpredictability of stock market. Vulnerability to those two emotional states might be a result of investors’ low comfort level due to the market instability.

Greed and fear relate to an old Wall Street saying: “ financial markets are driven by two powerful emotions – greed and fear”.

While sticking to this statement would be an oversimplification, it can also prove to be very truthful. Resisting these emotions can have an utter and deleterious effect on investors portfolios and stock market.

This old Wall Street saying  predates Kublai Kahn's duplex pleasure dome at the Xanau at 66th and Fifth.

Thu, 07/30/2015 - 22:11 | 6373744 GRDguy
GRDguy's picture

Not fair.  Their government told them it was the right thing to do.  "Trust us," their government said.

Thu, 07/30/2015 - 23:48 | 6374037 bid the soldier...
bid the soldiers shoot's picture

The author hangs his hat on this stat:

Chinese retail investors make up 85% of the market, a far cry from the U.S. where retail investors own less than 30% of equities and make up less than 2% of NYSE trading volume for listed firms in 2009.

Of the 85% of the small retail investor, how many of them were in the market before China allowed foreign investors to trade their market in March 2014?  How many rice farmers doubled down and margined further stock purchases when the foreign investors tried to take Shanghai to the moon?  Or was it just the foreign investors (Goldman Sachs) who rode that roller coaster bought into the Shanghai market on 50% margin?

Were stocks whose trading was halted, halted to prevent further selling or halted to prevent the "malicious sellers" from covering at lower prices as the authorities slowly forced the stock prices higher?

Of the huge spike in margin loans, how much of it was caused by the rice farmers in the provinces and how much was taken on by the giant investment houses in New York and London?

Same for the short selling: peasant rice farmers or JPMorgan?

Inquiring minds want to know.

Just as we snicker when we see statistics from the Bureau of Economic Analysis (BEA) and National Bureau of Economic Research (NBER) shoundn't we all have a giggle at the numbers from The Peoples Statistics of China?

 

******************************************************

Their government told them it was the right thing to do.  "Trust us," their government said.

Do you really think the Chinese Authorities were completely unaware of what happened in the Tokyo Stock Exchange in 1989, 3 years after the Nikkei allowed Wall Street in?

Either the Chinese are the major dumfuks on the planet or Goldman, Morgan Stanley will soon be singing the Song of Roland to deaf ears.

Thu, 07/30/2015 - 21:57 | 6373709 nmewn
nmewn's picture

Capitalists short listed nationalized-state companies.

No, we should support & subsidize private-state-partnership companies through our taxation for the benefit of our Leaders & the People according to the doctrine of kumbaya!

Beware ;-)

Thu, 07/30/2015 - 22:09 | 6373736 GRDguy
GRDguy's picture

70 trips for Goldman-Sach's Hank "The Hammer" Paulson to teach certain Chinese leaders (sociopaths) on how to take candy from a baby.  Big payoffs for some of them.

Thu, 07/30/2015 - 23:29 | 6373968 jonjon831983
jonjon831983's picture

Sounds like setting for Wall Street 3.

Fri, 07/31/2015 - 01:49 | 6374287 panicearly
panicearly's picture

Most people who bought tech stocks were educated, but more so after the crash

Then the real estate bubble educated them somemore.,

 

Fri, 07/31/2015 - 02:23 | 6374333 Crush the Infame
Crush the Infame's picture

Stock markets need to change from being stock price based to dividend based.  Investing should be about putting cash up today with the hope of getting more back tomorrow, not about making a quick casino win on market timing. 

Imagine if Vegas changed the odds on all the slots so that people starting winning a lot more than they were losing.  The mania would be surreal, but then they pulled back and all of these people who now depend on that money begin to panic.  Of course let's add in that a large chunk of the nation's pension funds and insurance companies were sending people to Vegas to play these rigged slots as an "investment." 

So what's next?  Now the government steps in and tells the Vegas casinos that they will provide the cash to keep the party going.  If this happened with slot machines people would be up in arms, but swap out slots for stocks and it's about keeping the "system" going. 

Capitalism doesn't require a stock market.  Corporate bonds and private equity could replace the selling of stock in a rigged market.  There would less boom but also less bust and no need for governments to intervene when the whole thing teetered on the verge of collapse.

Fri, 07/31/2015 - 02:25 | 6374336 Moonrajah
Moonrajah's picture

"Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A." (c) Gordon Gekko

 

Uhh... about that...

Fri, 07/31/2015 - 04:03 | 6374460 Batman11
Batman11's picture

Did you find any shoe shine boys giving stock tips?

Do NOT follow this link or you will be banned from the site!