The Chinese stock market is on a roller coaster ride, and it just started its major descent a few weeks ago. I have written an article on this for Wealth Daily.
I have been warning about a massive China bubble for a while now. First it was in real estate, and then a stock bubble grew on top of that.
On June 5, 2015, I wrote a post about China when the market topped the 5,000 mark. I specifically said in the first paragraph, “…the Chinese stock market is in a major bubble.”
How did I know? It’s because it had gone parabolic at that point. It was not sustainable, and the only thing justifying the major rise was easy money by the Chinese central bank.
The Austrian Business Cycle Theory applies here. When there is an artificial boom due to easy money and low-interest rates, along with government policies that encourage the bubble, then a bust becomes virtually inevitable.
The hard thing about the Austrian theory is timing. You can’t predict when the bust is going to occur. This sometimes gives a bad name to the Austrian school because predictions do not always turn out to be true right away. This is why, if you are an Austrian school follower making a prediction, you should make it clear that the timing of your prediction is not Austrian based. You have to make sure your prediction itself is Austrian based too.
The reason I was able to call the Chinese bubble so easily was because the stock market was up 150% in less than a year with an explosion upward toward the end. It was fairly evident that it was in its final stages.
Now the government has instituted major controls. Almost half the companies in the exchange have basically delisted, prohibiting trading of shares. What kind of exchange would allow that?
The government is prohibiting executives and major shareholders from selling. Meanwhile, it is encouraging the big players to help support the market and buy.
It is a completely rigged market at this point. The Chinese government is making America look pretty good right now. The Chinese stock market is now resembling that of a third-world country. What is the point of owning stocks if you can’t sell them? The majority of money in stocks now is basically prohibited from selling. At this time, most shares are essentially worthless if you are not able to sell them.
I don’t know where the Chinese stock market goes from here, but it doesn’t really matter at this point. The Chinese central planners have shown that they have little respect for property rights and that it is a corrupt and rigged market. Stocks may go up now because most people are unable to sell. The share prices no longer reflect any sort of market price.
I am still expecting a bigger crash in Chinese real estate. It is going to get bad there. This is going to affect the American economy. We just don’t know to what extent at this time.
We’ll keep paying attention to China, but the stock prices have become almost meaningless now. If they go down further with all of the restrictions, that is going to look really bad.