Support For The "China Is A Bubble" Case

The FT is reporting that steps are being taken in China to create a NASDAQ-like market in Shenzhen called ChiNext. The market would provide listing access for smaller growthier, relatively growthier we should note, companies.

One dynamic that has existed in Chinese markets is speculative fervor. It appears as though speculating is a very popular and enjoyable way to pass the time. This combined with restrictions as to who can access mainland stocks and how much they can participate has caused all sorts of distortions in the price of mainland listings versus Hong Kong listings.

Without make a judgment just yet these are market dynamics that exist, period. The extent to which these dynamics matter ebbs and flows over time. A new venue providing access to even more excitement and speculation creates another volatile dynamic.

Some folks call this a bubble some don’t. I’m not sure how a market that is down 50% from its peak can be correctly called a bubble except in the context of a popped bubble and even then I am not so sure. Regardless of whether bubble is the right word or not the market could decline a lot at anytime. The creation of ChiNext creates fuel for more in the way of a speculative run. Speculative runs can last a long time taking prices a lot higher. Trying to guess when it might turn into an implosion might be fun to do but has a low probability for being correct.

The thing that matters is not getting taken apart when or if it does blow up. The easy way is to keep the allocation small. A diversified portfolio that includes foreign holdings has to include China but does not have to include 20% in China. A 5% portfolio weighting to a market that goes death star is not a ruinous event. The focus should not be so much are you right or wrong but on reducing the consequences for when you are wrong.

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