Fat Dragon is well out of the Chinese stock market. A 200% gain was plenty for your columnist, who took his profits a while back. At the time of writing, the market had passed 4,000, or about 300% up on less than two years ago.
Whatever happens in the interim – whether we have the bust that many have been predicting for some time, or whether the air is released slowly, which, by Chinese standards would be three straight days of 10% falls – the fundamental problems of the market will not have changed too much.
To be fair, there has been some reform of the interminable problem that dogged the market in the four years from 2001, the overhang of non-tradable shares. The government’s policy to force an unwinding was the trigger for the recovery in early 2006.
But that will only take things so far. Other more intractable issues remain, notably the poor quality of most listed companies and the casino-like quality that still prevails in the market.
China is not the only market in the world to be more about gambling than investment. Anyone who lived through the US dot-com bubble could attest to that. Nor are things as bad as six years ago, towards the end of the last ramp-up, when the economist Wu Jinglian said that the Chinese market was "worse than a casino," because at least at a casino, "no one else was allowed to look at your cards."
The trouble with the Chinese casino these days is the overwhelming mismatch in the information available to institutional investors and the retail mob who follow their lead.
This goes beyond information about the health of a particular company, or some market sensitive announcement that could lift prices, it is about who knows which stock is going to attract the hot money and when. Retail investors, even if they are smart and can analyze industries and companies, can never match the institutional guys on that.
A few hours in a Chinese trading room can teach much of what you need to know about the retail market. (For readers who don’t live on the mainland, these trading rooms look like off-track betting shops, all flashing screens and furrowed brows.)
The retail investors don’t study the financials of individual companies. They follow turnover, which is a sure sign that the big end of town is either ramping up a stock or selling it down. The first inkling of a large increase in trading volume and it’s time for the little guys to dive in or sell out.
That is one reason why the market gyrates so violently. Momentum investing, when traders follow and then amplify an existing trend, can happen anywhere. But there is no momentum in the world to match ordinary Chinese when they spot a chance en masse to make some money, or cut their losses.
That is why the government is so worried about the market. The impact of any crash will fall disproportionately on the people least able to afford it. The institutional money, and also what are known in China as "self-raised funds," will almost certainly be winding down at precisely the moment the retail hordes are piling in with borrowed money or funds that had been set aside for their pensions.
For a leadership whose guiding maxim is the "harmonious society," such a car crash is not a very inviting prospect. The trouble is, at the moment, neither leaders nor regulators know how to avoid it.