By Chris Hunter,
What goes up must come down, and what goes up in a straight line is going to come down hard and fast.
That’s what’s happening right now with Chinese stocks.
As we’ve covered in Diary, China’s main stock market index, the Shanghai Composite Index rose 60% from the start of the year to its peak on June 12. Since then it’s down 24%.
As Bill warned Bill Bonner Letter readers in April:
On the evidence, central planning neither tames economic cycles nor creates them; it merely amplifies them.
Nowhere is this more evident than in the recent performance of China’s other big stock market index, the Shenzhen Stock Exchange Composite.
Think of Shanghai stocks as the equivalent of the S&P 500. Think of Shenzhen stocks as the equivalent of the Nasdaq. Shenzhen stocks tend to be more technology focused. They also tend to have a smaller market capitalization.
As you can see above, Shenzhen stocks soared 122% from the start of the year to their peak on June 12. Since then, they’ve plunged 30%.
This is a big deal…
According to colleague Alan Gula at Wall Street Daily, the total market cap of Shenzhen stocks is 46% of China’s GDP. Back at the peak of the dot-com bubble, in March 2000, the market cap of the Nasdaq was just 39% of GDP.
In other words, if the Shenzhen stocks continue to tank, it could have a bigger effect on the Chinese economy than the tech wreck in the U.S in 2000. The U.S. economy went into recession a year later.
And Shenzhen stocks have an even longer way to fall than Nasdaq stocks did back at the peak of the dot-com bubble.
Back then, the median price-to-earnings (P/E) ratio for Nasdaq stocks was 59.
At the June 12 peak, the median P/E for Shenzhen stocks was 121 – more than double the peak dot-com valuation.
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