Tuesday, February 20th. - Charts, and Commentary China Update Report
Let me say this very simply ...
China's Stock Market will Crash sometime this year.
I read a Chinese report this morning that said, "It is now estimated that 90% of Chinese loans are going into the equities markets". In an effort to combat this, the Chinese government just raised interest rates on the eve of their lunar New Year.
Somewhere, between now and the next 8 months, three Chinese stock market challenges will likely unfold:
1. The amount of inflowing money into their stock market will have a dramatic decline. There will be no more inflows from those who have already mortgaged their homes, or maxed out their credit cards to raise cash for stock purchases. Where will these people get more money after they are tapped out? For those who haven't yet done so, the government will step in with restrictions and interest rate policies that will help stem this risky practice.
2. Another lurking problem, is the inability of China's present system to handle a sudden spike in volume that would occur in the event of investors rushing to sell. This creates a high probability that the government will have to "shut the Shanghai Index down" when such an event occurs. The government is already worried about this, and about the possible social instability that this could cause in their country. Think of it this way ... many Chinese citizens have all their life savings and assets in the stock market.For many Chinese investors, the stock market "is their bank". If they need cash, or are become afraid of the market dropping, there will "be a run on the bank" ... just like we experienced in the 20's. There won't be the necessary volume of buyers to soak up the volume being sold by sellers unless the government buys the stocks being sold.
3. In an L.A. Times article, they told the story about the Jinbao borrower who took out a $40,000 mortgage to invest in the market. (This is now a common occurrence in China.) When warned that he might suffer losses, he said, "I have targeted one good stock and I just need the money for one month". Think about it ... the unrealistic expectations in this mania are at an extreme. The investor's "expectation" is that he will make "a 100% return in 1 month". What happens if it doesn't go up, and the stock falls while he is required to meet the payments on loan with a 36% annual interest rate?
It will be quiet on the Shanghai index this week, because financial markets are closed Monday in mainland China, Hong Kong, Taiwan, South Korea and Malaysia for the Lunar New Year holiday. Markets in Hong Kong and Malaysia will reopen Wednesday, while markets on the Chinese mainland and Taiwan will remain closed all week and reopen next Monday, Feb. 26.
Next week, many Chinese investors will plow more money in the Shanghai because it is the beginning of the new year of double luck and prosperity. Unless their government does something to quell the enthusiasm, they are likely to see another record week with a 10% to 15% rise. This is a game of musical chairs, and when the music stops, only a few will find chairs to sit on.
In a rebuttal, I received a call from a subscriber. He said that he has visited China and that the Chinese government will not allow the Shanghai index to fall.
How are they going to do that ... when they haven't been able to stop the Shanghai from rising 11.5% per week ... every week, for the last six and a half weeks? If they put in restrictions that stops this 10%+ rise per week, what will happen when those who borrowed at 36% interest rates can't make the payments the following month? (See the L.A. Times article below.)
How are they going to do that, when they have already put restrictions in where no one can take out a mortgage or loan and put the money in the stock market ... and yet by their own report, 90% of the loans are still going into the stock market? _____________________________________________________________
We are now going to shift to our charts of China's stock market.
On Monday, we reported that the Shanghai 180 Index had an 11.5% average weekly rise over a six and a half week period.
It had a pull back on February 5th., landed exactly on a support line, and moved back up from that point.
Here is how it moved:
The low on February 5th. was 5056. This morning, the Shanghai 180 was up to 6116.
If you do the math, it went up 1060 points or 20.97% in 9 days. It is now at a new high on its parabolic up move as seen in the chart below. When do you remember any of our indexes going up 20.97% in a year, much less doing it in 9 days? How long do you think this bubble will last?
( Also see these previous links: www.stocktiming.com/China1.htm and www.stocktiming.com/China2.htm )
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