Chinese stock market is on the boom. Chinese stocks are on fire. The figure, $6.5 trillion, sums up the value created in just 12 months of trading on Chinese stock exchanges — and why some see a rally that’s gone too far, too fast.
As China’s boom surpasses the headiest days of the U.S. Internet bubble, signs of excess are everywhere. Mainland speculators have borrowed a record $348 billion to bet on further gains, novice investors are piling into shares at an unprecedented pace and price-to-earnings ratios have climbed to the highest levels in five years. The economy, meanwhile, is mired in its weakest expansion since 1990.
The main role of a stock market is capital formation. IPOs are considered to be a source of cheap labor. When a company or an entrepreneur goes to the stock market, the idea is to get risk free funding from the market. This is what is happening in the China now. The government is encouraging the companies to go the stock market for cheap funding.
Li Feixiang, who has bet all his money on Chinese stocks that returned more than 150 percent in the past year, scoffs at the 4 percent yields on AAA corporate bonds.
“I can’t settle for low returns,” said Li, a finance industry worker from Chengdu who has some 100,000 yuan ($16,120) left in his savings account after investing more than 2 million yuan in shares. “I’m not interested in bonds. It doesn’t make sense to put my money elsewhere when the stock market is going through a super bull run.”
Chinese are investing in the stocks in droves making high returns. Nobody is interested in investing in bonds which are considered to be a safe investment. When too much money will go into the stocks, speculators will make a lot of money without driving the long term value of the stocks higher.
Rallies start when everyone start buying and there is so much buying pressure that no one is willing to sell. When everyone has been buying, suddenly everyone starts selling and no one then is willing to buy. This is precisely what happens in every market rally. So after every boom there is a bust. When stock prices start reaching the skies, expect a market crash. Don’t forget the 1929 stock market crash. A bubble has been creating in Chinese stocks. This bubble is going to expand and expand and then suddenly it will burst.