What China bubble?
Asia Unhedged observes that the market cap of the Shanghai Composite stands at CNY 40 trillion and the Shenzhen Composite at CNY 30 trillion, or US $11.3 trillion. Margin debt stands at CNY 2 trillion, or 2.8% of market cap.
The market cap of US stocks (the Wilshire 5000 index) is a bit over $22 trillion, and margin debt outstanding in the US is $0.5 trillion. That’s 2.2%.
Chinese stocks are slightly more margined than US stocks, but they are in the same ballpark.
That’s a bubble?
We read with bewilderment the concerns of the New York Times editors about China’s stock market:
Something strange is going on in the Chinese stock market. Even as the country’s economy has slowed, stocks have surged about 147 percent in the last 12 months as individual investors have poured their savings and have borrowed money to put into the market.
The sharp increase in stock prices must worry China’s leaders, because it could put household finances and the financial system at risk of big losses. It is particularly troubling that the recent rally has been fueled by an explosion of margin lending, in which brokerage firms make loans to investors to buy shares. Total margin debt outstanding is five times the level it was a year ago, reaching 2 trillion renminbi ($322 billion) on May 27, Bloomberg News reported recently.
There are, no doubt, plenty of inflated valuations for individual companies in the Chinese market (along with some cheap ones). But the overall valuation of China’s market at 20 times forward earnings isn’t much different from the MSCI World Index at 17 times forward earnings–and China is growing much faster than the rest of the world.
Higher stock prices allow company to strengthen their balance sheets by paying down debt. That’s a virtuous cycle of debt reduction, as Asia Unhedged has noted in the past.