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Econophysicist forecasts Chinese stock bubble to burst between Jul 17th to 27th

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Note: Cross-posted elsewhere.

Econophysics has never been a branch of economics which gained mainstream credibility although it enjoyed somewhat limited outreach with quantitative finance. But then again no one took the Austrian business cycle theory seriously until recently. Not trying to say econophysics is like Austrian theory of course.

A bubble about to burst?Some bloke predicted the Shanghai Composite Index will peak between Jul 17 to Jul 27. Let’s wait and watch to see what will happen. Pretty much many people expect some form of market correction to occur for China; studies and news articles report month after month that China is awash with excess liquidity the Chinese central bank seem unwilling or unable to do anything about.  To make matters worse, China isn’t known for its regulatory oversight of its financial sector.

In the event this disaster actually occurs, whether as predicted or delayed, where does this leave Temasek Holdings, which poured millions into China Construction Bank?

Note: Posting this does not indicate my endorsement of his prediction.

Update: Bloomberg reported on July 15th that China’s stock market recently overtook Japan’s as the 2nd largest in the world after the United States.  The Shanghai index gained a record 75% this year alone.  What’s particularly worrying is that index stocks currently have a record P/E ratio of 33.2 (!!):

BNP Paribas Securities (Asia) Ltd. last month cut its rating on China to “neutral” from “overweight,” citing valuations. Stocks on the benchmark index are trading at 33.2 times earnings, almost triple the 12.9 multiple on Nov. 4, when the measure dropped to its lowest since the financial crisis. Earnings per share declined 7 percent last year and will probably remain “flat” this year, the brokerage said.

By contrast the highest monthly P/E ratio for the S&P 500 before the American stock market crash late last year was only 27.31 for 1st Oct 2007.  Quite disturbing.

Update 2: China doesn’t appear to want to take action to tighten liquidity:

Zhu Baoliang, chief economist in Beijing at the State Information Center, said it’s unlikely China will raise interest rates or require banks to set aside more cash as reserves “in the short term.”

The central bank has kept borrowing costs unchanged this year, after reducing the benchmark one-year deposit rate five times in the last four months of 2008 to 5.31 percent as the government sought to bolster economic growth amid the global recession.

“We haven’t seen a sustainable recovery in China’s economy yet,” Zhu said. “If we cut stimulus efforts, the economy may head towards a second bottom.”

Written by defennder

July 15, 2009 at 11:09 PM

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