Stir Fried Stocks

Asia Times is reporting stock market transaction volumes are exploding in China.

Six months ago, total transaction volumes on the Shanghai and Shenzhen exchanges were less than US$5 billion per day. That figure now stands 10 times as high, at $50 billion per day. This volume is something China can be proud of, barring one minor detail, namely that the central bank and various policymakers would much rather not see it happening.

Even as central bankers exhort the country's citizens to beware of bubble-like conditions in the stock markets, investors appear unruffled, reversing the policy impact of any announcement. Be they students, farmers or construction workers, every Chinese living in the two big cities of Shanghai and Shenzhen appears now to have a brokerage account.

Conversations in the normally noisy dai pai dongs in Guangdong province and Hong Kong drop to a quick hush whenever the subject of stock tips comes up. Dai pai dongs are uniquely Cantonese eateries, generally specializing in a limited range of food items. Besides the delicious and cheap food, the eateries are also known for their communal seating, and extremely high noise levels.

It's a case of stock market fever for Chinese investors.

Millions of first-timers are getting involved in the frenzy as Shanghai's main market gauge continues to post eye-popping gains.

After watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action.

The 45-year-old office worker stood in line at a bustling brokerage last week to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up more than 51 percent this year.

"We still can make money," Ding said as she stood at the counter at Tiantong Securities with the paperwork for her new account. Asked what stocks she would buy, Ding said: "I don't know. I'm still learning."

China is in the grip of stock market fever. Shares are changing hands in record numbers as first-timers pour in new money. Some are mortgaging their homes or dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."

Last week, the Shanghai index passed the 4,000-point mark for the first time, and economists say it could break 5,000 in a month.

"We are opening 40 to 50 new accounts a day," said Zhang Jun, deputy manager of the Tiantong Securities branch. "Six months ago, it was four to five a day."

Nationwide, the number of trading accounts has soared 30 percent over the past year, to 95 million, one-sixth of them opened in the past four months, according to the China Securities Depository and Clearing Corp., which is owned by China's two stock exchanges.

Stock prices are 30 to 40 times earnings, an unusually high ratio for many major markets, which some say makes them unrealistic.

"But that is not paying attention to earnings growth, which is very, very strong," said Goldman Sachs' Hong Liang.

And many investors believe Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics in 2008.

"We hear that before 2008 the government won't let prices fall," said Ding's sister, Ding Jingxian. "We're not afraid."

Interesting Soundbytes

1. Wanting a "piece of the action"
2. Opening an account but not knowing what stocks to buy... "I don't know. I'm still learning."
3. Mortgaging homes to buy stocks
4. Dipping into retirement savings to finance a frenzy of trading known as chao gu, or "stir-frying stocks."
5. "We are opening 40 to 50 new accounts a day. Six months ago, it was four to five a day."
6. Stock prices are 30 to 40 times earnings
7. "Earnings growth is very, very strong"
8. Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in late 2007 and the Beijing Olympics in 2008.
9. "We hear that before 2008 the government won't let prices fall"
10. "We're not afraid."

I do not think I have seen as many soundbytes in an article that short ever before. This seems eerily reminiscent of the Nasdaq before it collapsed. Here is a chart sent to me by "BC" for comparison purposes.

Nasdaq vs. Shanghai



Click on chart for a better view.

Mortgaging homes to buy stocks .... after a quadruple runup in prices! Yikes. And we are seeing the same kind of rationalizations we saw before: "But that is not paying attention to earnings growth, which is very, very strong," said Goldman Sachs' Hong Liang. Is anyone asking if the earnings growth is sustainable?

I guess my favorite soundbyte is the idea that the government will not let the stock market fall. If that was remotely possible would the Nascrash have happened or the Japanese stock market have plunged like it did? Would housing prices in Florida and mortgage lending imploded?

Of course it's different in China. In every bubble you hear the same melody, even if some of the lyrics change. Certainly the idea of Stir Fried Stocks is a new one. But one line is always present: We have no fear. Ultimately the market proves otherwise, 100 percent of the time.

This post originally appeared in Whiskey & Gunpowder.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/