Irrational Exuberance?

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So the People’s Bank of China has spoken, but will China’s legions of punters listen? Of course not. On Friday after the market closed, the central bank imposed three separate new measures aimed at curbing liquidity and slowing economic growth–and also reining in the current stock market frenzy. There were always doubts about whether such measures were too little too late, and today proved that cooling punters’ feverish buying of stocks is going to be a real challenge. After opening down around three percent, the Shanghai Composite index promptly reversed course and moved into positive territory, closing the day up about one per cent at a new record. The market has already risen 50 per cent this year and 130 percent last year, but don’t expect any cooling off anytime soon, regardless of what the authorities do. This isn’t about P/E ratios or even about speculation but what brokers like to term the “weight of money.” As long as economic growth continues apace, the personal income generated has to go somewhere. Banks accounts offer so little you might as well stuff your cash under your mattress. (That’s why there was an announcement–little noticed–on Friday that the total amount of money held in bank accounts in China had for the first time dropped below the total amount of money invested in shares) Property is already wildly overbought and anyway far less liquid, and reuiring much greater amounts of capital. So where else is there but the stock market ? Of course the bubble will burst eventually, but like the bull run on wall Street that prompted Alan Greenspan’s “exuberance” remark, it could be years before reality sets in.

(That, by the way, is by no means advice to anyone to buy. The opposite if anything. Personally, I wouldn’t touch this market with a bargepole but then if I knew what I was doing I would presumably be rich which, sadly, is definitely not the case….)