Shanghai 6000 and the Roaring Twenties

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A few months ago, the Shanghai market topped 4000 and people talked about a bubble — we’ve discussed that here on many occasions. Now the Shanghai market has topped 6000. The Shanghai market is up about 600% from last year and is trading at a p/e of 69x earnings. WSJ:

investors greeted the start of a Communist Party conclave by sending the Shanghai Composite Index above 6000 points for the first time ever. The benchmark Shanghai Composite Index added 2.2% to finish at 6030.09. Heavy two-way trading reflected confidence among buyers that the party under President Hu Jintao remains committed to economic and social reforms…

The index has surged 125% so far in 2007 and has risen by a factor of almost six times since mid-2005. Last year at this time, the index was below 2000, a run that has made China the best performing major market in the world for a second year…

“There is just so much money in the market on the prowl for investment outlets, which is why today investors are snapping up not only first-tier blue chips but the second-tier ones as well,” said Zhang Gang, an analyst at Central China Securities. Stocks are expensive, with a price earnings ratio at 69 times last year’s income for the average Shanghai Class-A share at the end of last week.

In a two hour speech to top delegates on Monday morning to start the Communist Party’s National Congress, Mr. Hu…cheered traders with an emphasis on bigger picture goals such as quadrupling the 2000 gross domestic product by 2020…

“Mr. Hu…cheered traders with an emphasis on…quadrupling the 2000 gross domestic product by 2020.” That translates into a growth rate in China’s GDP of 11.25% per year for the next 13 years — China has never before achieved such a thing, and it certainly can’t from an export led economy. The last figures we saw from Chinese sources said that “over 70 percent of China’s economy now depends on foreign trade.” Undoubtedly that is changing, as China develops its domestic economy and infrastructure. But it will have to change very rapidly indeed for China to achieve its 2020 goal, because China’s current rate of export growth is clearly unsustainable.

We note that there was similar optimism in the United States during a famous period of its industrialization, when the nation was busy creating the world’s tallest buildings, turning an agricultural workforce into an industrial workforce, and in general feeling pretty good about itself. Indeed, Mr. Hu’s comments remind us of President Coolidge’s State of the Union message to Congress, as reported in the New York Times of December 7, 1927, almost exactly 80 years ago, in the midst of outstanding economic and stock market performance in the then-industrializing United States. There was great optimism in that time too (by the way, the p/e of the Dow Jones stocks at the time of the Great Crash was less than 20x):

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You will note that things went to hell in a handbasket less than two years after that optimistic appraisal by President Coolidge. We surely hope today’s great industrialization avoids the pitfalls that the US and the world experienced almost 80 years ago. But markets trading at 69x earnings and Presidents forecasting super optimistic growth rates into the distant future are indicators of a triumphal attitude that is a little scary in its lack of realism.

2 Responses to “Shanghai 6000 and the Roaring Twenties”

  1. Thomas Jackson Says:

    I wonder how good are tyhe bona fides of the earnings and profits of these firms as well as the honesty of the balance sheets. I doubt that these firms are what they are supposed to be and people will pay dearly for their mistakes. I worry about the blowback from the billions that have been invested in this Potemkin Village.

  2. gs Says:

    The index closed at 5667 today, and here’s a straw in the wind:

    With China’s car market up 24% so far this year, you’d think these would be fat times for auto manufacturers. But many of the mainland’s carmakers are hurting. Sales are falling far short of lofty targets they had set for the year, driving prices down by as much as 15% and squeezing margins…

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