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China's Stock Market vs. the Free Market

by in Financial Planning
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Many years ago a friend gave me some great advice. He said, “Know what you don’t know and don’t pretend you know it.” So here’s what I don’t know about China’s stock market – I don’t know exactly how the Chinese government runs it. I don’t know how much I can criticize it without going to jail as some outsiders recently have. I don’t know exactly why and how it affects our market. I’m sure there is a lot more I don’t know but this is supposed to be a short blog so –

Here is what I do know about the China stock market - I know it is not a free market. I know the government encourages the Chinese to not only invest in the market but I am told they encourage people to borrow money to invest in the market. I also know the China market was up about 130% over about a 14 month period to June 13, 2015.

So here’s a little personal story about the Chinese stock market. Chengdu has a population of about ten million people and is the center of a lot of business activity. It is about a two and a half hour flight west from the coastal city of Shanghai. .The city has an annual exhibition in June. It has 15 – 20 thousand visitors. Chengdu is also known worldwide as the home of the unique and cute Panda Bears.

I was invited to be the opening Keynote Speaker for the exhibition. I had never been to China before so to be invited for this and have my way paid for business class round trip and a five star hotel was to say the least a very special treat.

 

Just before I was to speak the chairman of the exhibition asked me if I would be willing to comment about their stock market. I assured him I was no expert on the Chinese stock market but I would be happy to make a brief comment.

My brief ten minute comment about the Chinese market made one significant point: the market was significantly overvalued and likely in a bubble. I suggested they not borrow or even invest in their market until the market corrects itself.

The tricky part of saying this was figuring out the best way to create an acceptable context to give my opinions. I was told that there were some dignitaries in the audience and that one was a representative of the Chengdu chapter of the Communist Party, which in the final analysis rules everything. I hate to feel intimidated by anything but I also like my freedom. So here is what I did. Before making any one point about their market I made the same point about the U.S. market’s history. I started with 1972-1973, 1987, 2000-2002, and 2008. All of these markets were a disaster. I mentioned how in November, 1999 I suggested in an interview with Bill Griffeth on CNBC that everybody got out of technology for the first six months of 2000. I also told investors to start pulling back in 2007, before the worst market in my lifetime hit like a hurricane in 2008. I did not emphasize how the financial crisis represented the worst of capitalism. It didn’t seem appropriate to give a perceived edge to my hosts.

My overall theme related to how important it is that all Chinese people have access to at least the basics of a financial education. My suggestions were very well received. To make sure I had their attention at one point I paused and did something a bit risky. I told them that President Xi Jinping asked me to introduce a new sport to them; it is called Handball (many of you know I play 3 times a week and have for about 40 years). As I said that I bounced a handball into the audience. To my surprise they tossed the ball around the audience. For sure, everyone was awake and laughing a bit.

The day after my comments, June 13th is when the Chinese market started correcting, sounding a world-wide alarm. More on this in another blog…

The main point I want to make in this blog is that we can be thankful that we have a free market. It is often affected by the extreme greed of Wall Street and crooked politicians, but in the long run American business enterprise – big and small will rule the day. We have reason to hope even as we have the worst ever January. Do not despair! Our free market will reward us once again. I know that! What I don’t know is when-

Vern Hayden has been a CFP (Certified Financial Planner) since 1978, and is considered a financial planning pioneer. He is the Founder and President of Hayden Wealth Management Group, a fee-based financial planning firm that offers a comprehensive range of services.


Vern is a regular commentator on several leading national news and financial television programs that appear on CNBC, NBC, Fox News, Bloomberg and PBS, including WealthTrack with Consuelo Mack. CNBC branded Vern, “Mr. Mutual Fund”, and has praised him as “one of the leading Financial Planners in this country” (Brenda Buttner, former Host of The Money Club). He is also a regular contributor to the financial press, including CNBC.com, TheStreet.com, the Journal of Financial Planning, and the American Association of Individual Investors Journal. His latest book, Getting An Investing Game Plan…Creating It…Working It…Winning It, was published in 2007 by John Wiley and Sons. Vern also conducts financial education programs on behalf of many companies and charities, and is a sought-after speaker at financial and industry conventions.


Active in financial planning circles for more than 40 years, Vern has been a board member of the CFP Board of Standards and has chaired the National Endowment for Financial Education, the former parent organization of the College for Financial Planning, which created the CFP™ (Certified Financial Planner) designation. He was President of the North Bay California Chapter of the International Association of Financial Planners (IAFP) in 1975 and Founding President of the Westchester/Rockland Chapter IAFP in 1987.


Vern has a Bachelor of Arts in Philosophy from Wheaton College with extensive graduate work from University of Southern California, American University, University of Oregon and New York University. He was also a Major in the U.S. Air Force. Vern hails from South Salem, NY, and is an avid handball player.


Vern Hayden can be reached at (203) 454-3377 or vhayden@haydenwealth.com.

Regulatory Disclosure: The information on this website has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. This website is neither an offer to sell nor a solicitation to buy any securities. Vern Hayden and Gerard Gruber offering Securities and Investment Advisory and Financial Planning service through Geneos Wealth Management, Inc, Member FINRA/SIPC.  Investments are not FDIC insured. Investments are not deposits of the financial institution and are not guaranteed by a financial institution. Investments are subject to investment risks including loss of principal amount invested.