The bubble in the Chinese stock market is beginning to be pricked. The government is trying to prop up the stock market. The government has thrown in everything but the kitchen sink. It has reduced interest rates, relaxed lending requirements, allowed pension funds to buy stocks, is even allowing apartments to be used as a collateral for margin debt to purchase stocks, is urging brokers to buy stocks, has made short selling difficult and there are rumors of the state itself buying stocks.
Chinese economy represents serious risks to global growth. There is a big stock bubble, a big credit bubble, and also a big real estate bubble. It is difficult to forecast when these bubbles will burst, but it is important for investors to be cautious.
Growth is slowing. Various PMI indicators have periodically moved below 50, 50 is considered neutral and below 50 forecasts economic contraction.
The new leadership is more concerned about the quality of growth than the absolute growth.
The risks for long-term investors in China remain very high due to three transitions: transition from primarily an export oriented economy to more domestic consumption, transition to less infrastructure spending, and transition to aging population.
China’s rapid rise over the last two decades has been propelled by exports driven by low wages and infrastructure investments. Now these policies have sown seeds of a number of bubbles in the economy. Bubbles always burst, the only question is when.
Data from The A Report