The long-term consequences of China's coming stockmarket correction are the ones to fear
IF YOU were a Chinese worker you could have spent the past year toiling to earn a living. Or you could have bought some shares and sat on the sofa (see article). Chinese equities have been on a bull run of epic proportions. The CSI300, an index of the biggest mainland stocks, has more than doubled over the past year. That looks positively anaemic compared with ChiNext, a market for Chinese startups which has tripled in 12 months; let alone with shares in Qtone, an online-education company that gained almost 1,300% between its listing early in 2014 and the middle of this month. Its own directors have warned investors to be wary of "ignorant hype".
The signs of overvaluation are everywhere. Stocks listed on the Shenzhen exchange, home to most tech firms, have an average price-earnings ratio of 64; for those on the exchange for small and medium-sized enterprises it is 80. (For most stocks a P-E ratio above 25 is considered expensive.) ChiNext is now priced at nearly 140 times last year's earnings, a valuation that puts it in the same league as NASDAQ, America's tech-heavy exchange, at the height of the dotcom frenzy. Companies whose shares are listed in Hong Kong and in Shanghai are trading at a 30% premium in the mainland, near a four-year high. Some are twice as valuable in China, even though mainland money can now more easily slosh southward into the Hong Kong market.
Retail investors, long the "greater fools" of stockmarket booms and busts, are piling in. In a single week in April, Chinese punters opened more than 4m new brokerage accounts. More than two-thirds of newcomers to the market left school before the age of 15, according to one study. Construction companies that have rebranded themselves as high-tech firms have seen their shares double.
The markets are plainly soaring too high. At some point they will crash. Predicting exactly when is a fool's errand, but the warning signs are accumulating. Recent violent lurches in the share prices of Hanergy and Goldin, two Chinese firms listed in Hong Kong, may have been early signs of trouble. Housing markets in big cities are heating up again: that will probably lead investors to turn away from equities and back to property. Even the Chinese authorities have started warning of risks, though whenever the market has shown signs of correcting in the past they have lost their nerve and talked up share prices. More important than guessing when the crash will come, however, is the question of how serious its economic effects will be. Paradoxically, these are likely to be more damaging over the long term than the short.
