Don’t Fall for the China Bubble Chatter

There was a whole lot of chatter out there in the financial media this week regarding China, more specifically on the question of whether a China equity bubble is starting to burst.

My recommendation to you, especially if you have money in Chinese stocks, is to not fall for what I consider to be the false narrative that there is a China equity bubble.

Yes, Chinese stocks have seen big gains this year. Those gains have been particularly robust in the A-shares market, with funds like the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) surging some 70% during the past six months.

During the past five trading sessions, ASHR has given back some ground. How much ground are we talking about? Try 3.46%.

Yes, that’s right, 3.46% in a week vs. nearly 74% gains in the fund before the trading week began.

If you call that a bubble bursting, then I’ve got a bridge to sell you.

I jest, of course, but you get the point. The idea that somehow any real damage is taking place in China just isn’t borne out by the numbers.

In large-cap Chinese stocks, you might be able to make a case that a slight pullback is taking place. For example, the iShares Large-Cap China (FXI) is up 20% during the past six months, and during the past five trading sessions it’s down… 1.87%.

Wait, the bubble chatter is over a 1.87% decline???

Well, here again I jest, but reducing this bubble chatter to an absurdity is deserving of humor, as it is eminently laughable when compared to the actual facts.

Now, to be fair, there were legitimate reasons why stocks in China pulled back this week.

Higher margin requirements announced by a few major brokers, reports that regulators were scrutinizing banks over money flows into stock markets and the meltdown of several China solar stocks all weighed down the country’s markets.

Yet none of these reasons is any serious cause for concern. The real cause for concern is buying into the China bubble chatter, and to that I recommend you — just say no!

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