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July 8, 2015 | Greed. Fear. Repeat.

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The poor Chinese. They’ve been pilloried on this blog for single-handedly making Vancouver houses (not to mention those in Unionville or Richmond Hill) unaffordable to the locals. And while there are no stats to prove it isn’t actually cheap rates and house lust doing the job, it’s just easy to blame the Asian dudes.

Some people think, therefore, that what’s going on with the Chinese markets these days will have a big impact on Canada. Here are some thoughts.

First, in case you didn’t hear, stock investors in that country are currently having a cow. China is giving us a great example of what classic greed and fear can do. It ain’t pretty, but it does provide a good reminder of what happens to any market where emotions supplant logic and people invest with their pants. Like, oh, houses in YVR.

In the past few years, wanting a more modern, market-oriented economy, Chinese authorities have encouraged people to invest in publicly traded corporations. So, about 90 million folks took up the offer, pouring trillions into equities. Markets soared. As they rose, investors did what they always do – get euphoric and pour more gas on the fire. If you remember the dot-com/Nortel experience of 1999, you know what I mean.

So, stocks shot skyward. The Shanghai index added about 80% between 2012 and 2015. Investors here who owned ETFs like the large-cap FXI saw the value rise by three-quarters – outstripping returns from any virtually all other corners of the world. This happened concurrently with a Chinese real estate boom that saw more trillions poured into speculative construction. As land prices romped higher and ghost cities emerged, authorities tried to dampen the excitement. That worked. The bubble’s now popping in a disorganized fashion.

Ditto the stock market. Greed squeezed prices higher, encouraging investors to borrow to buy more, and enticing companies to use their own shares as security for loans to load up on additional stock – putting more upward pressure on its price. Classic bubble behaviour. Kind of like borrowing against your house to give your daughter money for a Toronto condo down payment, which gooses the entire property market.

Well, the inevitable occurred. Prices peaked. Smart people started to take profits. The economy stuttered. Fear replaced greed. Suddenly everybody wanted out, and jammed the exits. Over the last month, since it peaked (June 12th), the Shanghai market has lost 32% of its value. The selling continued with another 6% drop on Tuesday – but something more sinister has been allowed to develop.

CHINA MARKET

In the past days about 1,500 companies have requested that transactions in their stock be halted – which represents close to half of all equities traded in China. That means most investors can’t get out. They’re unable to liquidate holdings to pay off margin debt now being called because stock values have dropped. That’s caused a spillover into other areas, like commodities markets, where selling is also epidemic as investors grab cash wherever they can. So, the price of oil, grain, copper and iron decline. Meanwhile those companies are in no hurry to trade again because many of them know the stock they pledged to buy more stock will crash, creating fat losses.

The Chinese authorities, who encouraged the speculative bubble, are swooping in. They cut interest rates. They suspended new initial public offerings. Yesterday they banned large shareholders or insiders owning more than 5% of a company from trading for at least six months. They’ve restricted short-selling, promised ‘ample liquidity’ and allowed all those trading halts. Every night for the last ten days, a new emergency rescue measure has been announced.

Now, should you worry? Does this have the potential for a contagion that will make Greece look like a pimple?

Chinese investors went for a romp, and must now deal with the hangover. Practices like a widescale trading halt are clumsy, dangerous and likely to end badly. China may end up with a massive public buy-up of shares in order to stabilize the market, while scaring off foreign investors with draconian controls. It’s a gong show. A casino. But Chinese markets are still largely self-contained. The direct global spill has been fairly contained. And the stock market of China does not equal the economy of China.

So why are markets here reacting? Because China’s massive economy has the potential to slow global growth and cut demand for the kind of stuff Canada sells – rocks and trees and oil. This won’t impact Europe of the US in a negative way (cheaper energy, for example, is a good thing) but it’s a different story here. Combined with our already-shrinking GDP and the condo economy we’ve built, it suggests fading profits and jobs. Not the stuff to support million-dollar beater houses in 416.

Never forget, as well, that China is only 50% urbanized – compared to 80% in North America. Bubbles are the norm there, and only recently have capital markets become more transparent. Stock prices inflate quickly, with valuations double what they are in the West. For investors, China equals risk. The Shanghai market has four times the volatility of the S&P.

Of course, China matters. But the scary stuff might be temporary. Goldman Sachs said Wednesday the  market will bounce back 27% in the next year, erasing all of these losses. Greed. Fear. Relief. Greed. Repeat.

No wonder they like Vancouver.

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July 8th, 2015

Posted In: The Greater Fool

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