There is nothing a financial newspaper and indeed an academic economist likes better than a rich rich quick/ get poor quick story.
It is similar to the tabloid newspaper effect when they build up celebrity so they can take even greater pleasure from their downfall. It self perpetunates column inches.
Financial bubbles are no different.
I have posted on this topic before - the key, as I said then, was when taxi drivers and students start buying shares - the quote below in bold is therefore telling.
"Chinese Stockmarket": Speculative bubble?
Here are a few links to "China bubble" stories.
Bubble inflation
A market that goes up 200 per cent in less than 18 months, and trades on a price-to-earnings multiple of about 50 is not necessarily a bubble. But if it looks like a crocodile and grins like a crocodile, it is probably best to treat it as a crocodile, just in case. China's stock market has inflated to a worrying level, and because of Chinese policy and the state of the Chinese economy, it could go higher before it falls.
Penniless college students, housewives, and taxi drivers are reportedly flocking to deal in a Shanghai market that is up more then 40 per cent so far this year. Chinese investors have shrugged off a caution by the governor of the People's Bank of China and pushed shares to valuations that are extremely optimistic, if not yet insane.
But valuations do not matter much in a bubble. In 1990 many Japanese shares reached price-to-earnings multiples in the 1980s, and in 2000 the Nasdaq market in the US traded at more than 100 times its constituents' profits. Once investors start to buy shares purely because they are going up, what counts is whether they have the confidence to keep the process going.
Two features of China's economy encourage that kind of confidence.
First, like every other economy at an early stage of development, there are structural problems that can force money into the stock market. There are not many domestic bonds and bank deposits barely keep pace with inflation. China, still somewhat communist, has capital controls that prevent individuals investing abroad. Chinese citizens' only real investment choices are property, which is illiquid, and the stock market. It was always going to be bubbly.
Second, China's fixed exchange rate makes it hard to keep credit growth under control. The People's Bank of China may have to buy $500bn of foreign currency with renminbi this year to keep the exchange rate down. But the exporters who receive those RMB deposit them in China's commercial banks, so the PBoC has to hoover up the RMB by selling government bonds to the banks, to prevent explosive growth in the money supply.
But sterilising reserve accumulation of $500bn a year - a level unprecedented in economic history - is becoming increasingly hard and rapid growth in bank lending adds fuel to the stock-market fire. There are still things the Chinese authorities can do: liberalise capital outflows, free up domestic markets, and float more state companies to increase the supply of shares to investors. But China may not be able to avoid a large currency appreciation for too much longer.
China bources eclispe all of Asia
Without new policies China’s shares could go still higher
The Short View
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