Good morning! Did you see the Robert Peston documentary last night at 9pm on BBC2, about China's credit-fuelled investment boom since 2008? Fascinating. A number of key points struck me - that he sensed a general mood of impending doom amongst the Chinese people (which could explain why insiders are so keen to exit AIM Listed Chinese stocks at virtually any price)?
Also, that an estimated 15% of the housing stock in China has been bought by speculators and is lying empty - a clear sign of an overheated housing market. When the property crash happens, the banks will be hit hard with bad debts, although being a one party State the Government has the power to do whatever is required to prop up the Banks - although nobody knows the size and risks in the shadow banking sector.
It's the explosion in debt in the last five years that is the most remarkable thing - the Chinese banking system has apparently grown from 120% of GDP to 200% of GDP in just five years, if I recall the figures correctly. It was not clear whether that includes the large shadow banking system, but probably not, as nobody knows how big it is. So the true figure could be much larger. 200% doesn't strike me as a crisis level though, but the rampant growth in lending cannot possibly continue forever.
As Peston concluded, history demonstrates that a credit boom on this sort of scale has never ended well. So I suspect that worries about China could now become a key investor concern. We certainly need something to rein in bullish sentiments in our Stock Market, as it's really getting out of control as far as growth companies & some smaller caps are concerned, in my opinion.
I cannot remember equity markets feeling this frothy about growth companies since 1998-99. Valuations are becoming bonkers on many growth companies, often with lousy business models - but nobody cares (for now) if the share price keeps going up (Ocado, and others spring to mind). We're now firmly into the "euphoria" stage of this bull market in my view, so I reckon it could be maybe another year or two before the inflated prices of growth companies experience a crash?
I've shorted a few over-valued growth companies, but it's not going well so far. So perhaps it would have been better to sit on…
