Chinese Taking Out Unsecured Loans to Invest in Stock Market

In China, we are told, a new government agency, the State Foreign Exchange Investment Company, could, "effectively create the world's largest hedge fund." What does that mean? It means that the Chinese fund's investment of billions of dollars in the financial markets could send the asset boom booming even more.

And also from China comes a report on how the Chinese reacted to former Fed chief Greenspan's prediction that they were headed for a "dramatic correction."

"Ignoring warnings," says the headline, "Chinese rush into stocks."

Not all the Chinese are flush with cash, of course. But just as being broke and unemployed is no barrier to home ownership in America, having no money doesn't keep the Chinese out of the stock market.

Reuters reports:

"Chinese banks are prohibited from lending money to buy equities, but there are big loopholes.

"Some big banks have signed pacts with state-owned companies enabling staff with secure jobs to take out unsecured loans of as much as 200,000 yuan (USD$26,300) for up to a year, bankers said.

"Hua Chao works for one such firm. He borrowed 150,000 yuan from a bank last week and quickly moved it into his brokerage account.

"'I only need to pay 9,000 yuan interest for the loan I got, but I think I can make at least 70,000 yuan a year by investing that money in stocks,' Hua, an office worker, said."

Hua.. hua... hua... we cannot speak Chinese, but we can laugh in any language. What a poor naïf... he thinks he's going to make almost 50% annual gains on his stocks. Someone should set him straight.

"Hua...Hua," you might begin.

"What you laughing at?"

"I'm not laughing, I'm just getting your attention."

"Then, what so funny?"

"You are, you silly turnip. Don't you know that the best you can hope for in a balanced portfolio is real gains of about 3% to 7% per year?"

"Are you kidding me? Last year, China's stock market went up 100%. It's already up 70% this year. You Americans are stupid. You're yesterday's news. You're has-beens. You're just jealous because the Chinese economy is growing four times as fast as the U.S. economy. And the Chinese have money. We have one trillion dollars. Now we don't have to fight America. We can buy it."

Alan Greenspan is (for once) right! And who cares? The Dow sold off only 84 points...even after the world's most famous economist came out publicly and said that the world's most go-go market was headed for a crash.

You can never know the future. But there is nothing in the future that is not, somehow, prefigured in the past. You can trace every oak tree back to a sapling...and back to an acorn. Every big galoot you see on the street began life as a tiny baby. And every market trend has a beginning and an end.

There's no magic... no real science... and no guarantees, but if you look hard enough you can sometimes see where you are in the cycle of things.

In markets we have two clues - the two Ps. Prices and Psyches. As to prices, we decipher them by looking at how much revenue a given investment will produce. Generally, at major bottoms, you can buy an asset for 5 to 10 times what it will return each year. At major tops, on the other hand, you'll have to pay over 20 times annual earnings.

At bottoms, people are sure that prices are still too high...and that they're coming down more any minute. Later, after prices have run up a bit, they become more confident. Eventually, they fully commit themselves at much higher prices and are sure they will never come down.

One both scores - prices and popular psychology - markets worldwide appear to be much closer to a major market top than a major market bottom.

So, we'll hoist our old, tattered Crash Alert flag again this morning.

Bill Bonner
The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

• None Found