China Warning!

By: Marty Chenard | Mon, Feb 19, 2007
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Let me say this very simply ...

China's Stock Market will Crash sometime this year.

I spent two days posting updates on China's bubble last week (See links: China1 and China2). The Shanghai Index is now in a "parabolic rise" moving much higher and faster than our Internet bubble ... the chart is at the bottom of this page.

On Friday, a friend forwarded the link and information to this important story about China's stock market. Link: http://www.latimes.com/...

After listening to CNBC applaud the historic rise in the Shanghai index, I was elated to see the responsible reporting that the Los Angeles Times did on the subject. Staff writer Don Lee wrote the article in with the help of Cao Jun in the Shanghai Bureau. My congrats to them for writing a timely and informative piece that the rest of the media is avoiding.

If you recall, I mentioned last week, that shoe shine boys were buying stocks, while other Chinese investors were mortgaging their homes and borrowing on their credit cards to invest in the Chinese stock market. The Los Angeles Times and Don Lee did a much better job than I did of getting to the heart of the situation in China ... as you will see on their link and article below.

You may be horrified when you read about the mania levels the Chinese stock market has reached. The reality is, that as a country, we were doing things just as crazy before the stock market crash in 1929.

Please ... take the 3 minutes necessary to read the Los Angeles Times article below, and my posting at the bottom of this page showing the 20.97% that the Shanghai 180 Index has gone up in the last 9 days. (The Shanghai 180 Index has gone up over 10% per week for the last 7 weeks, and has been in a parabolic rise since last year.)

StockTiming Comments ... Surprisingly, the Shanghai stock market is probably going to run up higher before it falls.

Why? Because China's lunar new year began on February 18th. According to the Chinese zodiac calendar, the upcoming year is the Year of the Golden Pig. The year of the Pig is traditionally thought to bring good luck and prosperity. Some believe that the 60 year convergence of the "Golden Pig year" means double luck and double prosperity. This has many Chinese investors feeling that it is Chinese destiny for their market to soar even higher in its already parabolic rise.

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 the L.A. Times article below, you will read about the Jinbao borrower that 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?


The L.A. Times article ... http://www.latimes.com/...


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?

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Marty Chenard

Author: Marty Chenard

Marty Chenard
StockTiming.com
Asheville, NC 28805
Tel: 828-296-1200

Marty Chenard is an Advanced Stock Market Technical Analyst that has developed his own proprietary analytical tools and stock market models. As a result, he was out of the market two weeks before the 1987 Crash in the most recent Bear Market he faxed his Members in March 2000 telling them all to SELL. He is an advanced technical analyst and not an investment advisor, nor a securities broker.

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