In the last 5 years retail Chinese investors had massive losses in bitcoin, gold, the local stock market, bitcoin again, now P2P.
Is it fair to say that they rush from one investment fad to the next, typically buying the top? This is how it looks from far away, can someone with local knowledge comment?
I remember a significant anecdote about Chinese assumptions when a Chinese-Canadian I was dating explained she always goes to busy restaurants on the assumption that a lot of customers means they have good food. The western bias is towards being the first to discover an unknown restaurant with great food that just hasn't had time to build a reputation, but that's not how a typical Chinese person would approach the restaurant problem.
Abstracting that decision-making style to retail investing in a country with a bias towards savings, and the nature of Chinese equity markets makes a lot of sense.
your description about the average Chinese mental feature might be right. But the restaurant example is not correct.
Maybe a little off topic. I'm a Canadian Chinese my self. I learned hard lessons within Canada so I will likely to choose busy restaurant. In China there might have long queues for special brand food from some unique restaurant but usually people don't wait for dinner or lunch. Average Chinese are impatient just like average American. When they expect waiting for a casual lunch, most of time they will turn around to find next restaurant because there are countless attractive options.
Canada in general is a slow country and restaurant market is not competitive with exceptions of a couple of big cities. Waiting is normal for Canadian. In early times, being impatient I've made many wrong choices by turning around to find a less busy restaurant which always led to terrible experience without exception. Before I made wrong choices I was thinking that how those busy restaurants can survive by treating their customers so badly to let them wait in hunger. It turned out that alternatives were always worse. In China both are likely to be replaced by competitors very quickly with better services. In Canada both survived for long time. Differently market ecology. So I leaned to choose the less evil of them
I agree with this being a valuable heuristic. Not for whether or not the food tastes delicious in terms of seasoning or flavor, but are they moving product. It’s easier to think of it in terms of a butcher shop. You don’t want to buy meat from a butcher shop that gets few customers (yes exceptions for boutique expensive butcher shops). You want the busiest butcher shop you can find that meets your other parameters. It’s only one factor, but I consider it a rather important one.
I’ve seen too many episodes of Kitchen Nightmares and similar shows to take a chance on a low volume restaurant that isn’t low volume due to an intentional design decision.
That's actually a very useful heuristic because, unlike perhaps in the US, in many parts of the world food standards even in higher quality restaurants are rather lax.
Even in the US I learned the hard way about eating lunch early. Chipotle is perfectly fine with serving old steak from yesterday if you're one of the first customers of the day.
I was told once that Wendy's chili is made from the hamburgers that weren't sold the day before. I don't know if it's true or not, though. Even if it is, that's some fine chili for a chain fast food restaurant.
No it's not. It assumes there's a correlation between quality and customers, or at least that quality is a prime cause of customers. But there's no reason to think that's the case. In fact, it's more likely that location is the prime factor: the restaurants in Times Square in NYC are very busy, but they are by no means the best in the city or even particularly good. They just have great locations in the heart of the tourist zone.
I remember reading something by Tyler Cowen where, with regards to NYC restaurants, he advised trying the ones on the streets and not on the avenues, because the streets get less foot traffic and so have to be better to draw people in. I've found this generally to be true living here.
After location, the second most important element is probably hype/fame. The hot restaurant of the moment isn't the best restaurant of the moment, it's the one that has managed to capture people's attention, which could be for a variety of reasons ranging from a celebrity chef to some new gimmick.
The vast majority of america does not have such a bias toward location. It's makes a good heuristic, in america. It's not surprising when there's exceptions.
One thing worth bearing in mind about the restaurant analogy:
The life cycle of restaurants in China is often very short - they open with investment and fanfare. They’ll have a great chef on board, a new and interesting signature dish, good ingredients, new equipment and high standards. After 6 months, all going well, the investors have made back their money. After 12 months, the profit has been made and the owners might look to sell. After 18 months, the place has beeen sold at an inflated price and the new owners will cut costs and quality to squeeze as much money as possible out of the place for its remaining lifespan.
So, a crowd of people means the place is new and quality is still high. No crowd means it’s either just crap quality, or it’s towards the end of its life cycle and quality has dropped.
Someone else can tenuously try relate that to Chinese investment psychology :)
> The western bias is towards being the first to discover an unknown restaurant with great food that just hasn't had time to build a reputation, but that's not how a typical Chinese person would approach the restaurant problem.
"I found it before it was cool" is a comparatively small thing in the US. The crowded restaurants aren't Chili's or On the Border, as trends have changed, but Instagram, Yelp, etc, drive huge crowds to a certain group of winners. The whole "influencer" thing is a marketing industry desire to capitalize on followers, a concept that is very accurately named.
This is actually a very old notion that pre-dates social media, and even computers.
Back when long summer family road trips were the norm, a common saying was, "Eat where the truckers eat." Truckers were the Yelp influencers of the era.
Roadside diners, especially chains, would have oversized parking lots to attract truckers, which would then attract families. This was further capitalized on by the diners opening motels in back. (Think Howard Johnsons.) Or by other hospitality chains deliberately opening near popular diners. In a college marketing course, I remember it being noted that a certain hotel chain (Holiday Inn, maybe?) rarely did its own location research, and instead just opened across the street from every outlet of a particular diner chain (maybe Denny's) that it could.
To this day, motels and diners have a symbiotic relationship, though now probably for convenience reasons since, as you noted, people can find out about other options more easily on their smartphones.
Why do you think that perspective does not apply to americans? I don't eat at proper restaurants much but when I ate fast food,the busiest ones also had more people flocking to them(chick-fil-a for example). Not many people line up to eat at a no-name off brand chain that just opened,and I see those pop up and go out of business a lot.
It's not a cultural thing but how one is brought up. Upper class or rural chinese might have a different approach just as americans from different walks of life and from different states might view it differently.
Same goes for investing, those who plan for long term gains have a different perspective than those who want 'buy low. Sell high.' For short term profits.
Why do you think that perspective does not apply to americans?
I can't speak to his logic, but I think the whole issue is a lot more complex than is presented in this discussion.
Convenience plays a big role in American dining habits. So does price and habit. And some people react strongly to coupons and advertising.
I think Chick-fil-a is far better quality than Raising Cane's. But the Chick-fil-a in my town is on the wrong side of a road median, and if I'm picking something up on my way home, I'll hit the other chicken place instead of wasting 20 minutes making U-turns.
But if you want to take the kids out as a 'reward' meal,assuming you never been to either establishment,would you go to a busy chick-fil-a or a new not so busy raising canes closer to your house?
Convenience applies to fast food but restaurant dining is a bit different,I think what is more relevant to the thread is quality seeking customers as opposed to convenience. Investors want quality over convenience,how they decide on what is of good quality is the debate.
> Chinese assumptions when a Chinese-Canadian I was dating explained she always goes to busy restaurants on the assumption that a lot of customers means they have good food.
Same concept here in Pakistan [guess we Asians think alike ;) ] - we go to busy restaurants and shops assuming they are full because they meet the requirements (good food, low prices etc)
that's a myth that keeps being persisted, much like their consistent 6-7% gdp growth every year.
if you read the article, it mentions that 'He and his family had invested 7 million yuan - their life savings'.
"The Myth Of China's 'Excess Savings' Is Weighed Down By Excessive Debt. Bank balances offset against enormous, rapidly rising, bad debts, a property bubble out of all contact with reality, a closed capital account to prevent money draining overseas while it still can, and an unregulated shadow banking sector where vast pools of notional value endlessly gyrate on air currents of uncertain origin"
The average Chinese citizens savings have now been engulfed in bitcoin crash, stock market crash, real estate bubble, p2p lending, and gold crash. When money can't leave China because of capital controls for average citizens, money goes into a risky bubble (otherwise it gets eaten away by inflation).
The biggest bubble, China's real estate, which has "$202 per square foot. That's 38 percent higher than the median price per square foot in the U.S., where per-capita income is more than 700 percent higher than in China." https://www.bloomberg.com/view/articles/2018-06-24/why-china..., is at a dangerous size. And it could be bursted by any external factors: Trump's threat to tax $500B Chinese imports, manufacturers hastened exist from China, Fed raises the interest rate a few more times, faster capital outflow from China, one of the emerging market's collapse, one of the more indebted private firm collapses, triggering a wave of collection, etc.
in 70 years, i will have paid for my property 3 times over in texas property taxes. So the US sense is more like a 20-40 year lease depending on the tax rate.
>The western bias is towards being the first to discover an unknown restaurant with great food that just hasn't had time to build a reputation, but that's not how a typical Chinese person would approach the restaurant problem.
But that's not bias, the Western approach is correct and the Chinese approach is wrong, if the goal is to find good restaurants (with the assumption that "Western" and "Chinese" approaches are as described above).
They’ve done well on real estate. The government would never let the real estate sector crash, the bubble must be maintained at all costs, or at least the landing must be soft.
Well, thats the hope anyways. I think that sector will crash eventually, but they’ve kept it going for so long.
The state, has valid legal pretext and a joker in the sleeve: the special interpretation of article 149 of property law. Not a single municipality in China ever honoured the textualist interpretation of the law, in all and every case ever going to court over article 149, the outcome was that the state can't deny the automatic lease extensions, but it leaves municipality the privilege to set conditions.
And yes, Shenzhen municipality was very very happy to resell property sold on 15 and 20 year leases. And people who were previous lease holders were royally fucked because they paid for property with 15 and 20 years leases as much as for a 70 to 50 years lease.
I thought that was Wenzhou, not Shenzhen. I didn’t hear of any lease issues happening there, not that I don’t believe you, but got a source where I can read more?
Both Wenzhou and Shenzhen had 20 year leases, and I think only SZ or Shantou had 15 year ones. These days, I think, only far inland cities still do 20 year leases, and BJ experimenting with shorter term 3 to 5 year ones.
I found these:
>Most of this happened before the property boom began at a national level. So it is those cities that set the early pace in residential property development that have been first to encounter the issue. Wenzhou is one of them. Shenzhen, China’s oldest special economic zone, is another. A few property owners there started experiencing problems about 15 years ago. In that case most were given an option to renew their expired titles by paying 35% of a ‘baseline land value’, calculated on a historic rate far lower than the prevailing market price, Guangzhou Daily has reported.
I the end, Wenzhou's leaseholders got free extension, but most likely just to shut them up. The govt did not yield to demands on relinquishing the right to set lease extension conditions. More on that in Chinese "ministry of land and resources decision, 23rd december"
I myself think that government's blessing on short term leases, (edit) plus hefty property tax on regular real estate seem to be the most logical way out of China's housing bubble.
My understanding was that WZ leaseholders got a free pass because their case was high profile during the property boom: if they were going to be charged market rates for extending the lease, then people would begin to doubt that their 70 year leases would eventually be turned over easily as well. The government wants everyone to think that the leases are just like buying.
I think China will abandon the entire leasing system once they get a national property tax in place. The current system is unsustainable at the local level, and localities need the continuous income a property tax can provide, rather than the windfall of leases every 70 years (if that).
>WZ leaseholders got a free pass because their case was high profile during the property boom
Yes, pretty much it.
Shenzhen been very happy reselling land from all those short term leases under the new sky high prices for at least a decade.
Excerpt: "land user could apply for an extension without usage change if they pay a renewal fee based on the benchmark land price – the initial auction price on the land set by the local government"
Interesting fact FIY: the 2007 property law was the most debated act ever in Chinese legislature, with it failing to pass a number of times. While Chinese legislators are handpicked yes men, they also are quite wealthy people in their majority. Understandably, art. 149 was not on the govt's draft, but was added under the unprecedented extreme pressure from the assembly members.
Will the govt resort to the "nuclear option?" The temptation to solve the money problem in one swoop is just too high.
My coworker was evicted 2 month ago by his landlord in Shenzhen when the landlord suddenly learned that his land lease has expired when the police came to hand him a note without any prior warning.
Well, there was a number of bank/property broker runs around the country, in second tier cities and below.
The party is far from being almighty. There was a huge number of other things that people were betting CCP will not let crash at all costs, but which nevertheless crashed: from currency, to stock market, to rural lending cooperatives (google that, it think their crash had impacted close to 1 in 3 or 4 people,) and on and on
China is no stranger to totally catastrophic financial crashes. Things like 2008 in US happen here every 4-5 years, but people seem to barely notice them.
The more they artificially sustain that market the harder the crash will be. It will be painful but I still hope something like that would create democratic reforms.
Actually the europeans are following a similar logic. Try to cushion the pain, amortize it over a long period, hope the problem goes away by itself. You end up 10 years after the financial crisis with an unhealthy banking sector, high unemployment, etc. So it doesn't have to crash but you basically end up having to live with the problem instead of fixing it. The US approach of taking the pain upfront and starting clean works better in the long run in my opinion.
Japan would be thrilled with just a lost decade. It's a 25 year blackhole of destruction and counting.
Before adjusting for inflation, their GDP is at 1994 levels in USD terms. If you adjust for inflation, it's a brutal rollback.
Not only did they stagnate on economic output, they accumulated extreme amounts of debt, heavily debased the Yen, saw their savings rate drop to near zero, and lost their demographics age wise.
They have to perpetually destroy their economy via currency debasement until the national debt is effectively defaulted on to a high enough degree that they regain economic breathing room. The net result of that is vast wealth lost, and a gradual adjustment down in relative terms for their economic standing vs other nations (they've fallen from a top five GDP per capita nation, to number ~20; most likely that down trend will continue at least until they're between Spain and Taiwan in rank).
The value of a currency is not directly, or even indirectly, related to growth of the economy. They simply have decided that a loose inflationary currency works best for them, as did the US, which is why they haven't changed that much wrt each other.
China can't cushion the pain anymore; they've been doing QE since 2008, and they're at 350-400% debt gdp. Way too high even for developed country, which they are not.
That's why they're trying to deflate the shadow debt (20 trillion, 150% of gdp). That's why people are losing tons of money (most if not all their life savings).
not an economist, but during periods of wage-inflation (i.e. now or soon), won't interest rates need to increase to prevent the economy from "overheating"?
Its fascinating to think about the knowledge of investors in China. How should people know how to invest sensibly if none of their parents or grand parents ever were able to own any such assets (because of poverty and communism)
Combined with Chinese people all saving too much and not spending on consumption - there is a huge pool of money just floating around going into every possible asset.
Its a bad combination that has to end badly sooner or later. (I've been saying this for 15 years but proved wrong every year).
This is getting downvoted (perhaps due to the rough tone) but there's a lot of truth to it. It's part of a larger phenomenon that isn't limited to investing as well. I think a lot of inexperienced outside observers of China from developed countries tend to miss that while some parts of China now have many of the trappings of developed nations, the rapid pace with which China has evolved means that they lack a lot of the knowledge that developed countries have about how to effectively manage/use these trappings.
Take driving for example. Cars are everywhere in Chinese streets these days, but most of them appeared in the last 10 years. Imagine being in a city where everyone is a new driver, and nobody's parents ever drove and thus couldn't teach them to drive. The same goes investment as well, and in many other areas.
This isn't to say that there aren't a lot of smart Chinese who read stuff on the internet/learned in school/figured it out on their own (there are), but the aggregate cultural knowledge level in a lot of things people in developed countries take for granted is often noticeably more undeveloped in China. They'll no doubt grow out of it with time though (and hopefully without any significant catastrophes).
There is also a lot of institutional knowledge missing. The US knows since the 1929 crash that it is very dangerous to let retail investors buy stocks on margin and there are very strict rules to limit that. I understand buying stocks on margin was common for retail investors in China and greatly contributed to the volatility of the Chinese stock market.
> How should people know how to invest sensibly if none of their parents or grand parents ever were able to own any such assets (because of poverty ...)
Many study Finance for this education. At least in America, Europe, Africa, Japan, Korea, etc.
I mean, lets be real... bitcoin traded at 20k for about 5 minutes. The extreme spike in price was over a 2 week period. The 6k figure is roughly where bitcoin was trading in October 2017 - after a year long runup from ~$500. Anyone who bought just 10 months ago still had better returns than the stock market over the same period.
There is a huge structural issue when investors of all asset classes believe the central government will bail them out. It happens to a vastly lesser degree elsewhere. We saw the folly of it in the US in 2008.
It is still happening with home prices in many, many countries. Too many older people with too much of their net worth tied up in their homes. Essentially governments in many countries discovered, perhaps on accident, that pumping up the prices of homes was an easy way to fund the retirements of much of the older generation without explicitly raising taxes.
The bubble essentially cannot pop because too many people would end up underwater or lose most of their savings - this is a huge political issue. But on the other hand, the bubble cannot continue indefinitely, because if home prices outstrip inflation and wage growth for too long, eventually nobody will be able to purchase a house at all - this is the economic issue. This is not only happening in the US but also many other Western countries and in countries like China (exacerbated by their lack of investment vehicles).
I don't know if the structural issue was people believing the US government would bail them out. The issue was probably more that we actually bailed them out. I can't really blame rich and powerful bankers for thinking we were gonna do something that we normally do for them.
Stop bailing them out, and they'll stop believing they're gonna be bailed out.
I worked for one of the large banks that got out of this crisis pretty much unscattered. The Friday before TARP was introduced, which ended the succession of large banks collapses in the aftermath of Lehman, we were told internally that we didn’t think we could last more than a couple of weeks in the current market. And if we only had a couple of weeks left, most of the other (weaker) institutions had much less.
Like for the cuban crisis, I think it is easy to forget how close we got to the brink. We have already witnessed a complete collapse of the banking system in 1929, in a world that was much less inter-dependent than it was in 2008. It is survivable but it is ugly.
Nobody wants a banking collapse. The question is whether the people who caused the collapse and profited greatly should get bailouts and keep their money.
In my view the government should have supported the system but not single banks. Let them go down and make sure that executives end up with zero money. Their lifetime contribution to the economy was negative so their bank accounts should reflect that.
I agree with you but there was a lot of talk about other approaches like nationalization but they got shot down quickly so the only path left was what the bankers wanted. I still find it hard to believe that the people that ran their banks into the ground walked away with hundreds of millions of dollars.
I still remember how all the people who made decisions or got hired in Washington during that time had an investment banking background, ideally Goldman Sachs. It was infuriating.
I don't really think keeping the financial system (which is an integral part of an economy) functioning is the same as keeping an asset bubble afloat.
The US gov. certainly didn't stop the real estate bubble from bursting. It merely stepped in to recapitalize banks, and got its money back with interest in the process of keeping the financial system from falling apart. At the time, everyone was gearing up to make a run on the banks to get their money out first.
The problem is that not bailing out may have been more painful than anything involved. The only US guide for this was when Hoover let the banks go into free-fall in 1929, which didn't get resolved until Roosevelt stabilized them in 1933. Are we willing to pay the price to do the right thing?
I wonder if the average Chinese is aware of these problems if not affected by them directly. If it is not reported in media and you don't know anyone who's affected then how would you know about this?
And knowing about is this important, so you don't put your money in such an investment.
Probably not the part about protestors having their doors kicked in and being rounded up and put into holding centers, I imagine. This is probably the most important thing people should know about.
Chinese people know that protesting is illegal and that their government is oppressive. It largely doesn't matter to them because they don't want to protest.
How they are investing their life savings is clearly the more important thing they should know about.
The government, including Li Keqiang, was officially promoting this industry a few years ago. The government also tightly controls the flow of information in China, keeping people from seeing alternate opinions. In addition to that, tight currency controls mean the middle class is starved for worthwhile investments.
I don't know whether these people should be bailed out or not (the companies definitely shouldn't be), but I can see why they're upset with the government. It's not really the same situation as in the US.
>In addition to that, tight currency controls mean the middle class is starved for worthwhile investments.
But that is kind also the only reason China is not completely sank in the saving glut. They want to make it appear to people that they have no better alternative to use their money than just spending it right away.
This is one of reasons that a thing as bizarre as that bitcoin took off her.
In reality, Chicoms have no effective way to stop capital bleed. The learned that the stronger signal they send that "tomorrow it will be harder to get your money out of the country," the more money actually leaves.
All kinds of eCurrencies is one side of that, but insane loan schemes is another: the current most popular funds exfiltration scheme is following - a guy loans money to some fund in China, and in exchange gets an interest free or very low interest rate load abroad. The fund then finds more a legal front for "investing abroad" or just bangs money away inside China on pump and dump schemes.
It is borderline tragicomic that whatever seemingly makes sense,and made in good faith policies made up by Chinese government end up acting with opposite effect:
1. The 50k USD limit on foreign remittance - actually aggravates capital flight, by sending the signal that domestic capital markets are so bad that government has to resort to such extreme measures.
2. Prohibition on private ownership of major assets (real estate, land, mining licenses, ownership of private business over the revenue limit, sea ad aircraft, and on) - was made to ease saving glut, by making people rent that stuff rather than own, but... you know: an average Chinese citizen save like crazy just to get the 50 year rent.
3. Salt tax - apparently is still being kept to force people buying Iodinised salt, but everybody knows where to buy salt around the state monopoly
The problem is that China's economy is based on keeping the genie in the bottle. The moment they let it out, all hell will break loose, and it'll be 1998 all over again.
I wasn't trying to say they aren't reporting it now. But the news here pretty much cheerleads for the government. So when the Premier and the former head of the central bank[1] are saying this sector is a good potential investment, CCTV News is going to pass that along uncritically to all these middle or upper-middle class people, who tend to have cash to spare and are used to huge returns like in the real estate market.
SCMP has an article about it[2], but they're blocked in the mainland. I looked for the Xinhua article they mentioned but couldn't find it on their English site. I did find this one on Sixth Tone, which is not blocked[3]. It doesn't mention the protests. My guess is you won't see much if any mention of the protests on any mainland news.
I really don't understand what the Chinese gov't expects when they are trying to control damn near everything. I honestly believe they are convinced they've successfully hacked capitalism.
This kind of wild west capitalism will eventually halt or at least stifle Chinese progress and growth, just because the risks of investments is too large.
I don't think the risks aee two large it's that the people putting the money aren't properly informed/educated. If you want to lend to people who have a 50% default rate, feel free! Just make sure there is an actuary who can help you manage your risk. I doubt these p2p companies were helping people weigh risk.
Is it fair to say that they rush from one investment fad to the next, typically buying the top? This is how it looks from far away, can someone with local knowledge comment?
http://static.atimes.com/uploads/2015/07/retail-investors.jp...