I take no position one way or the other on any Chinese stock market crash, including the most recent one. And despite a fairly high investment risk tolerance (I bought a Russia fund right after Boris Yeltsin fired his fourth president), I have never purchased a Chinese stock. My having to deal with China company books and records as a China lawyer has scarred me too much to invest in that market.
But I am certainly impressed by the analysis in a wonky article, somewhat poorly entitled, When China Stopped Acting Chinese. This article caught my eye both because it was sent to me by an old and very knowledgeable friend who has been in China for 20+ years and because it leads off by quoting Anthony Bourdain, who I love. The article is by John Maudlin, an economist and a co-writer of the book A Great Leap Forward (which is getting a lot of positive buzz, but which I have not yet read), and the Bourdain quote is as follows:
The one thing I know for sure about China is, I will never know China. It’s too big, too old, too diverse, too deep. There’s simply not enough time.
– Anthony Bourdain, Parts Unknown
About halfway through his article, Maudlin disagrees with Bourdain and asserts that it is in fact possible to know China, at least from a financial perspective:
We’ll compare and contrast the Chinese stock market and economy by looking at an unusual but very reliable data source. With apologies to Anthony Bourdain, whom I quoted at the beginning of the letter, we can know China. We just have to ask the right people the right questions.
I was one class short of an economics major, which means I studied just enough economics to know that economists’ predictions are correct about half the time. With that caveat, I guess it is possible to know China as well as anywhere else.
Anyway, Maudlin’s article talks a lot about The Beige Book, by Leland Miller, essentially called China’s stock market crash, and I believe it. I met Leland Miller a couple years ago when we were both speaking at Penn and he described his Beige Book to me and I’ve been a follower ever since. The Beige Book essentially gathers up data about China’s economy and then uses that data to get a read on China’s economy that just is not possible from Government numbers on how GDP will be 7 percent this year. What Miller said was that Chinese companies were reducing their borrowing to invest in their businesses (can you say overcapacity) and so if China enacted stimulatory policies, including loose credit, Chinese companies would invest their borrowed funds into China’s stock market, which would cause it to rise and then eventually fall.
The thrust of the article’s view on China’s economic future is in the following three paragraphs.
Beijing’s stimulus efforts created the stock market bubble; now their unsuccessful efforts to keep it from bursting are shaking my confidence in their desire to allow market forces to play a greater role in the transition from a top-down society to a consumer-driven, bottom-up society.
Still, I’ve learned not to underestimate the Chinese leadership. They make mistakes but usually recognize them and change course quickly. We’ll see what they learn from their current misadventures in stimulus and their attempts at top-down control of an essentially uncontrollable market. If they don’t learn the right lessons, China will face an even harder lesson in the future.
Regardless, we have to remember that Chinese stock prices, whatever they do, have very little to do with economic fundamentals. China Beige Book’s latest data show improvement in most indicators this year, consistent with continued, albeit slower growth.
If you are interested in learning more about China’s economy and its stock market and how the two interact, I highly recommend that you read Maudlin’s article.