China Syndrome

Mike Panzner writes: 

"If you overlay a graph of the Chinese stock market — in this case, the Shenzhen  Composite Index — on a graph of the Nasdaq Composite Index around the time the  dot-com bubble burst, it paints a rather ominous picture."


via Mike Panzner

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  1. Leisa commented on Apr 6

    Let’s see….what could cause the Chinese stock market to get a little quesy??? Oh I know….tariffs on their goods to the US and strong yuan and tiring US consumer–Hey, but the employment numbers are good, are they not?

  2. Alex Khenkin commented on Apr 6

    I wince at such overlays – if one looks long enough, one can always find two matching curves somewhere. They prove nothing and offer no guidance. IMHO.

  3. wcw commented on Apr 6

    That puts SSE capitalization around $1.3T, am I adding right? Don’t get me wrong, that’s a boatload, but that’s on nominal Chinese GDP around $2.2T. A 60% ratio of capitalization to GDP doesn’t of itself make me worry.

    The US, by contrast, topped out at a capitalization-to-GDP ratio over 150% in 2000.

    I wouldn’t be surprised to see China fall back to earth, but I would be just as unsurprised if its little mania continued. I eyeball a lot of charts, but I know always to keep the data in my head and to be skeptical of apparent correlation. Otherwise you end up with results like this.

  4. Lauriston commented on Apr 6

    “Spurious correlation”.
    It’s a holiday weekend, you are forgiven Barry. Your excellent articles the rest of the week more than make up for this one:)

  5. Null commented on Apr 6

    I think the important take away here is that you have an important stock market that has more than doubled in a year. That level of speculation rarely deflats gently.

  6. johntron commented on Apr 6

    take this with a grain of salt…

    if you take the correlation of the last 60 trading days of the $SSEC and compared these days to all 60-day periods of the $COMPQ, you get the following highest periods of correlation

    2/17/1971 0.944602833
    4/3/1979 0.929008844
    4/4/1979 0.928093725
    11/16/2004 0.917764977
    8/25/1987 0.910067624
    8/26/1987 0.909097224
    11/17/2004 0.907820828
    4/5/1979 0.90749235
    7/26/1977 0.905598039
    8/27/1987 0.905114705
    4/2/1979 0.903656527
    5/1/1996 0.903246581
    4/30/1996 0.901361166
    7/25/1977 0.900192679
    8/24/1987 0.896477044
    3/3/2000 0.895138714
    4/24/1978 0.8949597

    certain crash coming? of course not…but it never hurts to always know where the exits are.

  7. ManhattanGuy commented on Apr 6

    Agree with Alex …
    History never repeats!!

  8. DenverKen commented on Apr 6

    Graph almost any mania, from tulip bulbs on, and the chart looks the same. Amazingly the same. This is because the same progression of human psychology drives them all, and the fuel required for continuation finally becomes exhausted.

    It is highly unlikely this one will be any different.

    Feb 27 was the early warning sign. Sometimes they DO ring a bell.

  9. Barry Ritholtz commented on Apr 6

    (Troll comment deleted)

    1) I like the above chart — I find historical parallels intriguing;

    2) The quote is from Mike Panzner (not me) — I’ll indent it so the even the slow witted will recognize who the author is;

    3) You think this is “Yawn worthy?” The parallel isn’t remotely interesting? I dont believe you.

    4) I take criticism more seriously if there is a name and/or email attached. Otherwise, I assume anonymous comments are the work of trolls or cowards.

  10. Mr. Beach commented on Apr 6

    Earlier this year, the WSJ (I believe) had a an article that retail brokerages in China were opening on the order of 50 thousand new accounts a day.

    This sounds an awful lot like the stories I remember reading in the middle of the dotcom boom.

  11. Steb commented on Apr 6

    Correlations aren’t always useful. There are a number of differences between the chinese stock market and the internet stock market boom and collapse. To name one, the chinese corporations are making money. That wasn’t the case for many .com companies.

  12. John commented on Apr 6

    Two things I saw today for which I wanted to post links here. The first is this blog post which takes a very Ritholtzian view of Da Gub’mint’s job numbers; however, the real value of the post is the comment thread, with post after post of links to news stories that totally give the lie to the day’s big news.

    The second is this piece from Bloomburg: it seems China has raised their reserve requirements again, and is generally sounding grumpy about the level of rabid speculation in their markets and economy.

  13. Curtis Faith commented on Apr 6

    It is a simple fact of mathematics and economics, increasing slopes on price curves are unsustainable. They can keep going for a while, sometimes far longer than the pundits expect, but they do come to an end that is often bloody for those who are not prepared.

  14. wally commented on Apr 6

    Coincidence, of course.
    However, if the charts match as well going on the downhill side of the mountain then there will be something to remark about.

  15. John commented on Apr 6

    My bad on the first link, Barry; it came from one of your own comment threads. I had so many pages open that I lost track. Still, I’m not the author (that post was), and I can verify that it’s worth scanning through.

  16. kennycan commented on Apr 6

    The Shenzhen Stock Exchange is one of 2 major Chinese markets. If I remember correctly the Shanghai Stock Exchange is at least as large a cap as the Shenzhen. If that 60% is correct and I am remembering correctly re the Shanghai market, then the combined cap is at least 120% of GDP. That’s certainly toppy territory.

  17. John F. commented on Apr 7

    I think I have one of those on a grilled cheese sandwich!

  18. John F. commented on Apr 7

    On a serious note, I think the two charts plotted on a single log scale will suggest deja maybe.

  19. synchro commented on Apr 7

    Mr. Beach, I wouldn’t be so quick to conclude the Chinese companies are making money. Their accounting standards are still somewhat opaque. It is no wonder that recently 2 publically traded Chinese companies stocks rocketed _up_ when they announced losses. But…wait, come to think of it, the same thing happened to Micron last week. So, you see, there are quite a few similarities in terms of the degree of mass delusion and stupidity.

  20. rateesquad commented on Apr 7

    Well, I do not think that history will repeat it self. Although this is what I believe in:

    The price will go further up, but it will be faster. Accelerated path will give higher and higher returns. This will be the last leg up. After that… It’s down hill. Like Nasdaq did in 1999-2000.

    This might be triggered by some economic missmatch. For instance, high inflation and at the same time possibility of GDP growth of below 6% or so.

    Keep in mind that, people in China do not have a lot of money in the markets, like the others possessed in United States markets.

    Thus, the fall in stock in CHina will not hurt the Chinese economy. ALthough it might have some mild negative impact upon the good old markets. i.e. United States, Europe, Japan…etc

    Just my two cents.

  21. wcw commented on Apr 7

    I meant both Shanghai and Shenzhen. “SSE” was poor locution.

    If you want to check the math, please help. I took the numbers I found for 12/31/06 for Shanghai ($0.9T) and Shenzhen ($0.2T, it’s much smaller), summed them ($1.1T), larded on 20% ($1.3T) and divided by nominal Chinese GDP of $2.2T (60%).

    60% in China is “larger” than 60% in the US because of the state sector. Then again, Chinese GDP is going to grow 8% for a while, versus bubble expectation around 4%.

  22. Wall Street Examiner commented on Apr 7

    The footprints of all modern bubbles are amazingly similar in time and shape. Only the magnitude varies. However, in order to make the correlation, it’s best to look beginning at the time the bubble emerged from the base pattern to the peak.

  23. Dogstar commented on Apr 7


    What do the two sets of P/E ratios look like for the same time period? Ditto for GDP performance.

    Are you saying China will experience a “9/11” soon?

    I’m amazed that any professional money manager would waste time on something like that chart.

  24. Yaser Anwar commented on Apr 16

    Two centuries ago Napoleon warned China was a “sleeping giant” that “once awake would astonish the world”. Rapid long-term economic growth, an expanding share of global trade, and record foreign direct investment inflows all justify China as a rising economic power. Astonish it has.

    The Chinese economy, the 4th largest, has doubled its output to $2 trillion in the 5 years since it joined the WTO. Pressured by the US, China’s studying a cut in export tax rebates on textiles to 9% from 11 to reduce the trade surplus, but would that really matter?

    The budget deficit & low saving rate are the two attributes of the US deficit. The US & Chinese economies benefit each other. The US imports labor-intensive products such as clothes & living goods. They import because Chinese products are cheap. If the yuan appreciates & the US has to import from another country, the trade deficit will only grow.

    A soaring stock market triggered the launch of 90+ new mutual funds in China last year, raising approximately $51 billion. The Chinese experts, from the govt., universities & the financial industry, have agreed that the performance of China’s stock market is normal, saying the bull market is supported by the country’s real economic growth.

    But is it overheating? Optimists argue that after a four-year recession, China’s mainland markets rallied at the start of 06, with the main index hitting new highs throughout the year. With the upcoming launch of stock index futures, investors will push the market even higher.

    Investors worldwide poured $22.4 billion into EM mutual funds in 06, & half of that, $11.2 billion, went into China funds, according to EMPR. On April 11th, JPM’s Chinese fund mgmt. venture said it had received nearly $11.7 billion of subscriptions to its new equities fund in a single day, over 10x its original sales target. While regulators are capping new funds at $1.3 billion each, more than 50 new mutual fund applications are awaiting Beijing’s approval.

    Be cognizant that the over-subscription ratio is one of the highest seen at any fund since China’s stock market bull run began a year ago. In December, Harvest Fund Management, China’s largest fund co., raised a record $5.4 billion in 1 day.

    What’s causing all this? Besides China’s 9-10%+ growth, the current trend in the market reflects the excessive liquidity in China Mainland. Given the small stock numbers there, the renminbi-denominated A-shares have lured more & more capital, thus causing the market cap. of China’s 2 exchanges to rise to $1.8 trillion vs. Hong Kong’s total market valuation of $1.8 trillion.

    Given the valuations, there’s no room for disappointment. Will that be so? Considering 06’s boom was fueled largely by the financial sector, the widely expected move by the government in the next year to deregulate the rates banks offer on deposits will be game changing.

    Why? First, they will have the banks will have to compete for deposits and second, the tight monetary policy will exert negative affects on the performance of China’s listed banks, and the adjustment of financing structure will reduce the profits of banks. At present, approximately 80% the financing demand of domestic firms are catered to by banks.

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