Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 108

Feeling lucky? Another stock market spike in China

So far this year we have seen good returns from all asset classes (except cash), in Australia and globally. Shares are fully priced or over-priced but they are still doing better than their long term averages. Likewise with listed and unlisted real estate. Bonds are horribly over-priced but they too have generated above average real returns.

In a world where everything is doing well for investors something is bound to go wrong. It is impossible to over-weight (or under-weight) everything in portfolios so it calls for tough decisions. How long can the great 2012-15 QE rally last?

Here is a close look at the incredible spike in the prices of Chinese stocks in the last year, linked back to the perennial culprits – banks and the credit cycle.

The Shanghai index has shot up 120% in the past 12 months after five years of falls. Less well known is that this is a rather mild spike compared to past episodes.

There have been two great stock market spikes in post-1949 China. Both were fuelled by credit binges and both promptly crashed when credit dried up. In 1991-1993 the index gained 900% in 24 months but then lost 90% of the gains in the next 12 months. In 2006-2007 the index gained 450% in 24 months, but also promptly lost 90% of the gains in the next 12 months.

There was an orgy of bad lending in the 1985-1993 credit binge by the big Chinese state-owned banks. To end the party the government had to impose a total freeze on lending in late 1993. That crunched asset prices, employment, the economy and the banking system, and it took the next 12 years to clean up the mountain of bad debts in the banks.

As soon as it did, the next great credit/property/stock market bubble took off in 2006-2007, fuelled by cheap credit and geared-up local and global investors chasing the ‘China growth’ story. The boom ended in a crash in 2008 when credit froze as the global banking system seized up.

In the ensuing global financial crisis, the Chinese government embarked on a massive spending and credit spree to support the economy. The bubble re-appeared firstly in housing and then moved on to shares last year when housing prices started to fall. Driving the current boom are cashed-up first-time local punters, many using margin debt, and the spike is now being chased by foreigners eager to get in on the action.

The current stock market rally is quite modest by comparison to past bubbles and pricing levels are still not stretched – for example price/earnings ratios and dividend yields are not outlandish. The market may run up a lot further from here but banks are hiding another mountain of bad debts built up in the post-GFC lending binge, and so this boom will probably end the same way as previous episodes.

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund. This article is educational only. It is not personal financial advice and does not consider the circumstances of any individual.

 

2 Comments
Jerome Lander
May 08, 2015

There are a lot of Chinese stock promotors who will be making a fortune from this "government-blessed" equity rally and indeed "feeling luck"! The market is still treated like a casino by Chinese locals and short term speculation is running hot currently in the expectation of strong short term gains. It is a not a good market for long term index investors (what is these days!).

Australia's own Bronte Capital (global long/short manager) is well known for exposing examples of fraudulent Chinese stocks previously. It is absolutely imperative to understand who and what you are investing in there.

Chris
May 14, 2015

Absolutely Jerome, I could not agree more !

I have very close Chinese friends and some of them treat the stockmarket as a casino, speculating in companies they know nothing about, and if it goes up, they think it is because "they are lucky (as though they played a game well)" (they just don't know how ironic that statement is - it was blind luck)

There was also an interview in the April 2015 edition of AFR Smart Investor re: a firm that had uncovered some shocking Chinese fraud.

The joke is that the SEC could have done something against NYSE listed Chinese stocks when they found that some of them had been less than truthful, but didn't. Getting real information out of China is extremely difficult because most of the companies are SOEs and therefore, anything that the Party believes is a "State Secret" will not be released (including real financial data).

How on earth you are supposed to make an accurate investment decision in that environment is beyond me. As a long-term investor, the best that I can hope for is an ETF that covers Chinese stocks and as a part of an overall strategy (I use iShares IAA and IEM), because I sure wouldn't individually pick them nor put all my Asian exposure onto China.

 

Leave a Comment:

RELATED ARTICLES

Are Chinese investors still on training wheels?

Why China’s property market matters

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.