In reference to the success that China has had during the financial crisis and its trajectory towards perhaps unsustainable levels of growth, much like the United States before the market crash, I thought this article (link here) was particularly relevant.
The article states that massive growth in the equity markets in China has occurred due to inexperienced investors. "More than two thirds of new equity investors exited the education system
by middle school — which in China means around the age of 15. More than
30 percent exited at age 12 or below. Household wealth for new
investors is about half the level of existing investors."
This is particularly worrying because "there was already strong evidence that the 78 percent surge in China’s
equity markets in the past year was driven by momentum rather than
fundamentals. New trading accounts and trading volumes have soared.
Expectations on growth and profits have not." To me, this looks similar to the housing bubble before it burst. The housing market much like the equity market in China had huge increases on returns and people investing in those returns. Then the market crashed because the returns disappeared as a result of being backed by risky mortgages.
I think the risk in this case would be the inexperienced investors. Investing is a long-term strategy and uneducated investors tend to react drastically to market shifts. When they realize that growth and profit are not increasing like they thought (look at the Shanghai composite vs. 2015 growth forecast) and they pull out of the market, a crash will most likely occur, sending China through its own financial crisis.
I'm not sure how I should feel about this article. Higher education in East Asia is very different from that of America/Western world. America in general has very high percentage of people earning higher ed education and grad degrees and that would be especially applicable since lower-wage jobs are being outsourced. Would love to keep track on this topic with more data on other countries (especially mid-income countries).
ReplyDeleteI agree, China's equity bubble does look a lot like the US housing bubble, and it seems almost inevitable that China's equity bubble will burst and cause a financial crisis. This is not a good outlook for China's economy, but what is even scarier to me are the education levels of the new equity investors in China. It seems that with an uneducated market, China could end up in a financial crisis that they might not be able to get out of. This is a very interesting topic and I look forward to learning more about it throughout the quarter.
ReplyDeleteI agree. This sounds very dangerous. If people with low asset ownership are investing it potentially means that they don't have much of their own to lose (seeing as they are around 15 years of age) and are putting the country's economy at risk. The schools should really begin educating their students much younger if students start investing so young and caution them against sudden movements against change in the market.
ReplyDeleteMiddle school educated investors...how did anyone think that was going to end well?
ReplyDeleteHighly educated and experienced investors are incredibly important to these financial markets, especially when movements in markets such as these can have such a large effect on the overall health of a country's economy. As Nolan said, investment is a long term game, and it's likely that an inexperienced investor can overreact to short term shifts in the market, losing sight of the big picture, and in turn adversely effecting an economy.
I think this is an interesting article. The similarities between China's potential equity bubble and the 2008 housing bubble are fascinating. It is evident that there are potential dangers of having a larger sector of investors who not only have a low level of education but are young as well. For the Chinese economy, it can have cartographic outcome (financial crisis). However, we just have to continue to observe the Chinese equity sector and see how it plays out.
ReplyDeleteThis is a very interesting article. Just from personal observation, I think that there is quite a trend of participating in the stock market among youngsters in East/Southeast Asia. A few of my friends back in Vietnam have also been doing this, and usually they have someone to consult (e.g. parents who are experienced investors), or they themselves have researched very carefully, (and must be extremely brave too), before starting to invest. If this is the case for the young investors in China, I think it is healthy for them as well as the market. But if it is just a social trend, then it is dangerous.
ReplyDeleteAs Phy and Hang have stated above, although the investors may be young, the young investors most likely have support from more experienced investors or have extensively researched before investing. Nonetheless, it is possible that this is not the case for the majority of the Chinese population of youthful investors. If the investors do are not equipped with knowledge they need, then the Chinese economy will suffer from recession. Like Aleksis has stated above, investment is meant to be longterm, and it is possible that the inexperienced investors will withdraw investments if a shock occurs in the stock market. Regardless, I would be curious to see if China suffers or benefits in the near future from having so many young investors.
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