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Place your bets – The AIIB, the stock market and China’s Geo-politcal future

Michael Tyler

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Chinese GamblingGiven the Chinese penchant for gambling, (it’s illegal apart from in Macau), punting one’s investments into the only free gambling machine on the mainland seems like the natural thing to do.

China has its own new gambling machine. It’s called the stock market.

For the past twelve months, the Shanghai Composite has risen by 100%, and from 3,000 to 4,000 points since February, mostly brought on by domestic demand.

China’s New investors

China Tech StocksBloomberg Business – “Gan’s survey, which was conducted at the end of 2014 and covers some 4,000 households across the country, finds that the biggest new investors in China’s equity markets have below a high school education and relatively low levels of asset ownership.

Small and medium size investors are getting into shares for the first time. And these new investors are not high flying whizz kids from the city, more likely, according to this research non-savvy, non-educated aunts and uncles jumping on for a free ride to high returns.

As the property market has become less attractive, with Xi Jinping’s increased anti-corruption measures and oversupply in the market, who can blame them?

Where will the bubble burst?

Over the weekend, the National Development and Reform Commission changed the rules of lending in China, A Chinese national flag flutters outside the headquarters of the People's Bank of China in Beijingeffectively freeing $206 billion dollars into the Chinese economy.

China’s central bank changed the level of cash reserves required before a loan is available by 1%, the most drastic measures taken by the PBOC since the crash of 2008.

If you follow the current thinking, given time – this latest move can only bring increased investment to the Shanghai Stockmarket curio.

The Daily Telegraph says -“Some of the statistics are certainly pretty scary. Deutsche Bank points out that there are school uniform and ketchup manufacturers trading on 300-times earnings. China’s technology stocks are trading at twice the levels of American ones at the peak of the dotcom boom. Almost one in five stocks is on a PE ratio of more than 100. That is probably crazy.

People's square - ShanghaiWhere will the gravy train stop?

When the wheels come off?

As with all these things, when the venture loses it’s credibility. Investors see through it, hot money moves out, the market crashes…

China has been pumping it’s economy with cheap cash for years. Until I lived there, I never realised this was the case.

The cars you see, the new clothes with the new houses, new shops, new developments, the whole consumer bubble.

Everything is leveraged with cheap money from the state.

Step in the AIIB

Might seem bad right?

Step in the AIIB, or the Asian Infrastructure Investment Bank, the sudden and unexpected cause célèbre of the worlds financial institutions.

Chinese waving catIf China’s economy does encounter problems, it’s very likely, with this bank, foreign and western powers are going to take a punt on China’s future.

AIIB has new powers similar to that of the IMF, it would be able to step in and bail China out.

With, of course, inserting some concessions to the lenders, maybe in terms of human rights, Tibet, Taiwan, South China Seas, global warming, pollutionDalia Lama who knows…

LENDERS – (Austria 11 April 2015, Denmark 12 April 2015[44] , Finland 12 April 2015[45], France 2 April 2015, Germany 1 April 2015, Iceland 15 April 2015[46], Italy 2 April 2015, Luxembourg 27 March 2015, Malta 9 April 2015, Netherlands 12 April 2015[36], Norway 14 April 2015[47], Poland 15 April 2015, Portugal 15 April 2015[48], Spain 11 April 2015[49], United Kingdom 28 March 2015[32]).

All we can be sure of is that China would be beholden to these states if they were to bail-out and uphold the government, the state, and the People’s Republic of China.

If terms were made, and the People’s Republic of China refused, things would change. Geo-politically, it might be a whole different ballgame.

Sources: Bloomberg, Daily Telegraph, Quartz, Italy China Web

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