Episode 05 : China Mainland stock market bubble | business english podcast
|The mainland market was up 130% in 2006 and is still continuing its bull run.A lot of analysts are saying it’s a bubble. They claim that the current run doesn’t reflect true fundamentals. The P/E ratios are very high and regular individuals are opening brokerage accounts in record numbers, driving the demand for equities. Many think a lot of this behavior is because of limited access to foreign markets, low interest rates, easy access to credit, and a herd mentality on the part of unsophisticated investors. The government is taking measures to cool the market, such as tightening bank lending for speculative equity investments.
Key vocabulary and phrases that are discussed in the podcast:
What is a bubble? –
- An overvaluation of an asset class. This happens when many people bid up the price of an asset based on speculation rather than fundamentals.
True fundamentals –
Buying an investment based on looking at the real value of the asset. Looking at the P/E ratio is one thing fundamental investors look at.
P/E ratio –
Price to Earnings ratio - This is an important measure of whether or not the stock price is overvalued. You take the stock price and divide it by the last year’s annual earnings of a company. A P/E ratio of 20 for example means that the stock price is 20 times more than what the company actually earned in the last 12 months. Lower P/E ratios usually represent a better time to buy.
Why is there a possible bubble?
Easy access to credit – People can go to banks and borrow money to invest in the stock market. So this means people can invest more money than they have which drives up the price of stocks.
Low interest rates – This makes it difficult for people to earn much money with their savings. They therefore have motivation to look to take their money out of the bank and put it in the stock market where they feel they might get a better return on their investment.
Limited access to foreign markets – There are regulations that deny Chinese people the opportunity to invest their money in some foreign markets. This limits their choice so they are more likely to put their money in the domestic stock market.
Herd mentality – A kind of thinking or behavior when someone does something because everyone else is doing it, instead of using his or her own reasoning. So for example, if you buy stocks just because all your friends do, that is a herd mentality. Because the market has been going up, this causes the herd to blindly follow because they too believe they can make money.
Brokerage accounts – Accounts at financial institutions where investors can buy and sell stocks
Unsophisticated investors – Regular people who are investing but know very little or even nothing about investing.
Speculative Equity investments – Investing in stocks with high risk. Speculative investors have the chance to make or lose a lot of money.