From the always excellent Bill Powell in Shanghai:
About 18 months ago, Liu Junling, an upwardly mobile single Chinese woman, had a conversation with her boss, the CEO of a large, politically connected real estate developer in Shanghai. For the previous five years, people in China’s largest city had lived and breathed the property market—buying apartments, if they could afford to, flipping them for higher prices, and buying again. The government really wanted to cool off the speculation, the boss told her. Probably not a good time to buy. Then, almost as an afterthought, he added: It might be a good time to buy stocks instead. Liu balked. “I don’t really understand the stock market,” says the 35-year-old, “why it goes up or down.” Now she is kicking herself. “I can’t believe I was so dumb,” she says, “but I think it’s too late to get in now, isn’t it?”
Liu’s question—is there a bubble in China stocks?—is of global concern because of the knock-on effect a meltdown could have on markets worldwide. After soaring 130% last year, the Shanghai Composite Index suddenly buckled on Feb. 27, plunging 8.8% and giving investors in the rest of the world a sudden case of the Chinese flu. Since then, however, China stocks have resumed their near-vertical ascent, in recent weeks setting record highs almost daily. By some estimates, there is now more money in the Shanghai stock market than there is in bank savings accounts nationwide—this in a country where the per capita income last year was about $1,750. Yet the mania only seems to grow. On May 9, the total turnover on Chinese bourses exceeded that of all other Asian stock exchanges combined, a first. There are even reports of retail investors borrowing against newly purchased apartments or houses—shades of Japan in the late 1980s—to buy stocks. “I’m afraid this thing is in its final frenzy,” says Andy Xie, an independent economist in Shanghai. “People are going to get hurt.” Read more.