China Redux

China’s sizzling stock market and the attendant frenzied investing climate receives the full treatment on Page One of both the NYT and WSJ this morning. James T. Areddy of the Journal reports that “investors are doing everything from mortgaging their homes to borrowing against their credit cards to get in on the action.” Areddy compares China’s market to the late-1990s dot-com boom in the U.S., noting that both drew in a new generation of investors.

Investors have good reason to be excited; the Shanghai Composite Index was up 130% in 2006 and still soaring at the outset of 2007. But there are reasons for skepticism and concern, even in a high-growth economy such as China’s. Today’s two stories offer examples of classic speculative behavior. Here are some strong signs that widepsread speculation is impacting the Chinese markets:

- Mass borrowing on credit to fund investments in the market.

- Mutual funds raising $5 billion in a single day (!).

- Cultural or social hysteria over stock market investing. For example: “When I go to the beauty salon, even the girls who give me a manicure are talking about stocks,” said Shirley Lei, a consultant in Shanghai….”They ask me, ‘What should I invest in?’ They are doing their research.” Trawling for stock tips at the beauty salon is generally not a good sign.

- Trading houses that “seem like carnivals,” with computers installed in stairwells to handle excess traffic.

- Massive funds moving from one asset class (real estate) to another (equity).

- And this inconceivable factoid:

Online trading is spreading rapidly, and in recent weeks individuals have been opening stock-trading accounts at the rate of about 90,000 per day, 35 times the pace of a year earlier.

Many people already feel that the Chinse stock market may be overvalued. But it appears that large numbers of Chinese are entering the market in hopes of striking it rich. This is not a good thing, and it should make the Chinese government very worried. What would happen in China if the market began to slump, or worse, to tumble?