Shanghai Composite Index Tops 4,000, Chinese Bubble Set to Pop

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Do Shanghai skyscrapers have windows that open? If so, they might want to nail them shut.

The United States Federal Reserves’s rate-rigging group met yesterday. They announced that it was leaving the Fed’s key lending rate where it was (5.25%) but that it still considered inflation its number one worry.

What kind of ‘inflation’ were they referring to? Consumer price inflation? Or asset price inflation? Which one is most likely to do the most damage?

Yesterday, for the first time ever, China’s benchmark, the Shanghai Composite index, climbed over 4,000. Not only that, but almost $50 billion worth of shares traded hands on China’s two exchanges – one in Shanghai, the other in Shenzhen. That’s more than all the rest of Asia combined, twice the level of Japan, and TEN TIMES trading volume just six months ago.

In China, in the next 24 hours, approximately 300,000 new stock market accounts will be opened. Communists, survivors of the Great Hunger, the Great Leaps, the Cultural Revolution, widows, orphans, mental defectives – everyone wants to get into stocks.

Why? Because they are going up!

“Investors will continue to take money out of low-yielding assets and put it into the stock market, and that will continue to exacerbate a supply and demand imbalance in the market, which leads to inflated prices,” said a source close to the action, quoted in the Financial Times.

Wait a minute. Aren’t these the same people who believed Mao’s silly guff? Aren’t they the same dumbbells who took the Long March… who starved each other… who tried to make steel in their kitchen stoves… who wore ugly gray suits, held up copies of Mao’s pathetic Little Red Book, and put dunce caps on anyone with wit enough to object?

But the Red gods failed. And so they’ve found new ones – stock markets. They’ve been victims of collectivism. Now, they seem to want to be victims of the market system too. And when the end of the Chinese Bubble comes – there has never been a bubble without a pop – many of them are going to feel like jumping out of windows.

Meanwhile, in the West… shareholders aren’t so naïve. They weren’t born yesterday, like the Chinese. They were born the day before yesterday.

They’re not stampeding into overpriced investments they don’t really understand. Nope. They’re going into them slowly. Yesterday, for example, the Dow rose again… but only 59 points. Like the Chinese markets, the Dow rises every day, but not as much.

And there’s another big difference. The Chinese are investing real money… money they earn and save… money earned from making things and selling them at a profit. They’re not sophisticated enough to know that you can get rich without really working. They haven’t yet discovered the wonders of the financial industry… or learned how to get rich by doing deals with each other, using borrowed money.

In England, for example, there are now about 200 lawyers who earn more than $2 million per year. Today’s TIMES of London tells us why: because the number of deals done in the City, London’s equivalent of Wall Street, is soaring. “The astonishing rise in profitability mirrors the dramatic rise in the volume and value in UK and international corporate takeover work,” says the paper. The value of those deals has already passed the $2 trillion mark this year.

Someday, of course, all this feverish activity will come to an end. The Chinese bubble will burst. The fad for deals will pass. And then, much of this money – now getting passed around like a groupie in a rock & roll band – will disappear. Or go back to its rightful owners.

And then, the expansion phase of the credit cycle will be over.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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