Andy Xie: Chinese Market in Final Frenzy, Again

We're not alone in questioning the prudence of buying into the Chinese market right now. Turns out Andy Xie, previously of Morgan Stanley, has some pretty sober words for what he sees as a bubble in Chinese asset prices. (via Clusterstock, Barry Ritholtz)

The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn’t last. The turning points in China are often related to political calendar. Retail investors hold the popular belief that the government won’t let the market drop before October 1, the 60th anniversary of the PRC. Last time it was the 17th Party Congress in October 2007. This sort of belief is self-fulfilling in the short term. The market tends to roll over around the time. If the past is of meaningful guidance, this wave will taper off before October.

The idea that the government wouldn’t let the market drop is rooted in Chinese market psychology. In financial jargon, it is called a put option. During the Greenspan era, financial markets believed that he would always bail out markets in a crisis, which was the so-called Greenspan put. The belief in China should be called the Panda put. However, in reality, the government couldn’t reverse the market trend when it turns. Chinese stock market has big ups and downs in the past, which shows the government’s inability to stop the market from falling. Nevertheless, this imaginary put option remains deeply rooted in popular psychology.

Note that Andy Xie labels current China market bulls as "the most ignorant retail investors". If we then further consider Goldman's latest bullish China strategy piece we discussed in our last post, and assume some of GS's clients end up following the piece (almost guaranteed) it means that it's not just ingorant retail investors, but professionals as well who are "being sucked in by the rising momentum". (As Mr. Xie illustrates so nicely)

And just to further my previous view, I am not against Goldman Sach's as a rule, ie. I have not jumped on the Goldman-hate bandwagon. In fact I have highlighted their work positively in the recent past on this site. It's just that their latest China strategy piece really stood out as flimsy and pushed me to make my points. I judge research on its arguments, not its brand name. And in the end, I don't feel the kind of advice which the China strat piece put forward should pass for responsible, professional investment strategy, even if in six months time the bubble continues upward. The underlying risk is massive for anyone buying into the Chinese market now and prices could collapse on a dime. Buying now is a pure punt with massive risk. You would have thought the recent financial crisis would have made clear how dangerous bubble-chasing can be.