My Friend (a China Stock Investor) and his Changing Attitudes
Shanghai Index to fall 50% in Several Weeks?
A couple of days ago, on my way to Suzhou to drop off some sample parts at a factory, my friend & coworker hit me with a startling prediction: The Shanghai Index would fall by 50% within several weeks. The reason? Index futures (futures contracts on the main Shanghai index) that are about to start trading, which he believes will create heavy selling pressure. Pretty extreme prediction, wouldn’t you say?
Now it’s absolutely true that Chinese stocks are beyond overvalued. And things are getting crazier by the day. I hear more and more stories of people jumping into the market, both through the media and through friends, but especially from my girlfriend. She says more and more of her friends are getting into the market, and encouraging her to do so as well.
Yet to make the statement that stocks will fall 50% within the next several weeks, and to absolutely believe such a prediction, is going a bit far. 50% within a couple of years? Quite plausible. 50% in several weeks? Unlikely.
China Stocks: From Soaring to Crashing
And this is the friend that until recently believed the market would steadily march upward through the 2008 Olympics.
There is a pervasive belief among Chinese people and Chinese investors that the government controls the fortunes of the stock market. To some extent, this is true. At any time, the Chinese government can impose draconian enough measures that China’s stock markets will crash (how draconian is open to question). Yet the belief that they can keep it from falling is pervasive as well. Why? Well, beyond blind faith there is this notion that if stocks start to suffer, the government could open the market up more to foreign investment, which would save it from falling further. Right.
During a little expat get together the other day, a guy we just met insisted that there was no risk in Chinese stocks (as a whole), and that the government both controls the market and would not let it fall. Good luck with that thought process. Chinese stocks, like stocks around the world, are prone to the same massive short term volatility that pops up from time to time anywhere. To make a statement that Chinese stocks are likely to go up may be reasonable, to make one that there is no risk in the market is naive. At some point, all stock markets go down.
Given the extreme speculation that is taking place in China these days, that time might be closer than we all would like to think.