Doom merchants are fond of telling the apocryphal tale of the Rockefeller family scion who cashed in his stock portfolio just before the market collapsed in 1929.
Having stopped to get his shoes shined one day on his way down Wall Street, Rockefeller was surprised to receive investment advice from the shoeshine boy, who was happily handing out stock picks. Rockefeller decided that if shoeshine boys were punting in the market then there really was a bubble and he threw in his chips just in time to save the family fortune from the jaws of the Great Depression.
I think about this story every time a Beijing taxi driver or elevator attendant starts to talk about their stock investments and which shares are hot right now. But my reaction tends to be different from that of the apocryphal Mr Rockefeller.
In China, bull runs are exaggerated, not by the most obvious reason that there are just so many people, but because of the relatively backward financial system that gives too few investment options to anyone with a bit of spare money. When the average taxi driver or waiter starts dispensing stock tips, I would argue that means the bull market is just ramping up as individuals switch out of low-yielding savings deposits into the volatile stock market.
Flush with cash
There is about US$4 trillion sitting in cash (about half of which belongs to individual households) in China's banks, earning 2.5% annual interest at the very most. Headline inflation hit 1.9% in November and is expected to trend up to 3% pretty quickly. When it does, it will make more sense to spend cash than put it in the bank to depreciate in value.
The masses basically have two other investment options besides these bank deposits: real estate or stocks. With property now the target of government tightening measures, investors are more likely to turn to the stock market, which has more than doubled in value in 2006.
So the market, which has risen largely on the back of interest from institutional buyers and mutual fund managers, can expect to find still more impetus from individual investors previously fearful participating due to painful memories of a five-year streak of losses.
But this time around those individuals are not risking their savings by investing directly in the market. They are putting their money in the hands of professional fund managers, a trend that has sent mutual fund industry assets rocketing by more than 50% to around US$82 billion in the five months to November.
This is good news because volatile retail money is coming in through a more stable institutional channel rather than speculative direct investments, which can just as easily get out and collapse the market.
Economists conservatively estimate benchmark indices will jump at least 25% next year, but if individual retail investor exuberance really takes hold then we could see the whole show go ballistic.
The near doubling in indices last year was largely driven by the biggest and most prominent blue chip Chinese companies and by the wave of strong initial public offerings of comparatively good-quality firms. With more than 70% of listed companies in Shanghai and Shenzhen still not covered by analysts, a huge number of stocks could still be swept up by the rising tide.
Despite the fact there is no stock exchange in Beijing, it is the city's Financial Street where the bull runs begin and end, dictated by policy. And it is because these Financial Street bureaucrats have, in the eyes of most investors, managed to resolve the volatile issue of non-tradable state-owned shares that the market will continue to perform strongly.
After a frantic year and a half of reform the government has formally agreed to begin selling down the roughly two-thirds of all shares in listed state-owned enterprises that were previously to be held by the state in perpetuity.
With the ideological burden of state ownership cut loose and a wave of new, higher-quality companies listing on the exchanges the only dark cloud hanging over the market is the perennial problem of poor governance and dodgy dealings.
Barring any major catastrophes, the Chinese stock markets are now on track to begin reflecting the wider growth in the economy for almost the first time. The year of the pig is going to have a very bullish flavor.