An avalanche waiting to happen

Waiting for the bursting of the Chinese share bubble is like waiting for an avalanche. You can hear the rumbling but you have no idea when and where it will strike.

Among the most bemused of those waiting to find out are the Chinese authorities — torn between pride in the prowess of their markets and lack of experience in the way they operate. Last week the government made a tentative attempt to cool the markets by bumping up stamp duty on share deals and there was an immediate tumble in prices, followed by an upward blip and this week a more severe decline. Who knows where the market will be by the time you read this, but all the classic conditions of a stock market bubble are in place: the Shanghai exchange has seen prices rise by 130 per cent last year and another 50 per cent since January. Shares trade at around 50 times earnings (more than double the multiple in most markets) and buying frenzy has resulted in the opening of 100 million share-trading accounts; sometimes more than 300,000 accounts have been opened in a single day.

The authentic voice of the Shanghai bubble is to be found in internet chat-rooms, where the ill-informed avidly exchange information with the downright ignorant, sharing a xenophobic dismissal of foreigners who doubt whether the bubble can be sustained. Meanwhile, people mortgage their homes to buy stocks, and work slows in offices when the exchanges open and punters flick on their computers in search of hot shares.

In most markets the overwhelming bulk of trading is by professionals; in China private investors account for 80 per cent of turnover. Many have never owned a share in their lives until recently and do not even know the names of the companies they’re buying; all they know is their stock codes.