Geoff Cutmore - Morning Thoughts

Voices in my Head

What value do the comments of a former Fed Governor have? Enough to move markets is the obvious reply.

Alan Greenspan’s widely reported warning on the bubble like characteristics of the Chinese stock market flashed around the world this week and took the shine off a positive session in the U.S. The next morning foreign investors in Shanghai and Shenzhen listed B-shares bailed out. Given the volatility these markets enjoy the magnitude of declines were modest, but still indicates a pretty healthy skepticism about the valuations Chinese listed companies are trading on.

There has been an avalanche of column inches about the rights or wrongs of Mr Greenspan talking when his predecessor Paul Volcker maintained a discrete silence on matters economic. Much chest beating also about the reaction Greenspan caused – when apparently most of the financial community appears to recognize the heady multiples in china are unsustainable. Let's leave all that to the professional pundits.

I want to look at the behavior of the market. Mr Greenspan’s comments are a big deal. How could anyone who has spent so much time with the sharpest economists and forecasters on the planet not be worth listening to?

However, the market’s response could have been greater. Critically the domestic Chinese investors, only able to buy A shares, shrugged off the warning despite it being clearly carried by the state media. The Beijing government may, as they have indicated, want to cool the fever of speculation that has gripped Chinese bourses – but measures to slow lending growth can only have a limited effect in an economy that doesn’t have a proper banking system. Traditional monetary policy levers are of limited value when 50 years of communist rule has forced people to be more creative in how they earn, save and spend money.

We are witnessing the creation of a whole new class of people – the Chinese retail investor. A door has been opened and they are climbing through it. They are borrowing on their houses, borrowing on their land, borrowing on their jewelry, borrowing from friends and family, borrowing from relatives abroad who are also investing heavily. There is an appetite for equity that does not understand or care about price earnings multiples.

Western investors are blasé about the opportunity afforded by markets to invest in asset classes other than cash....but for many Chinese with money in their pockets from booming industries....this is nothing but a revolution.

And not even Mr Greenspan is going to spoil their party.    

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