Wednesday, February 01, 2012

China Bubble: A Blossoming Mania on ‘Himalayan Viagra’?

China’s bubble policy and the severely constrained capital markets appears to be driving people to look for objects in which to speculate on.

From the Wall Street Journal

For generations, Chinese men looking for a dose of vigor have sworn by a traditional remedy: fungus harvested from dead caterpillars, known in some quarters these days as Himalayan Viagra.

Now Chinese investors are using the rare fungus to try to boost something else—their investment returns. The fungus has doubled in price over the past two years and the top grade now fetches more than $11,500 a pound, according to Fuzhou-based brokerage firm Industrial Securities…

The problem for Chinese investors is that returns have evaporated from more traditional markets. Real estate was once China's favorite investment, but government efforts to contain price increases and keep housing affordable have led to price stagnation and even declines in some cities. China's major stock exchange in Shanghai is down almost 20% since the beginning of 2011. Bank deposit rates are lower than the pace of inflation, meaning savers effectively pay banks for the privilege of handling their money…

China's central government is less than intoxicated by the investment party. It said in November it would tighten oversight of Chinese asset exchanges, warning of "serious speculation and price manipulation" among some and adding that some "managers have run off with clients' funds."…

Some of the biggest boom-and-busts have taken place at art exchanges.

"Roaring Yellow River," a traditional landscape painting by the late artist Bai Gengyan, was the first work listed last year by the Tianjin Cultural Artwork Exchange. Within two months of the offering, shares were trading at nearly $3 each, up from about 15 cents, valuing the painting at about $18 million. The previous auction high for the artist's work was a bit more than $600,000.

About two months after the offering, the Tianjin city government suspended trading in "Roaring Yellow River" and another painting, and the exchange imposed limits on daily and monthly price changes. Shares of "Roaring Yellow River" now trade at about 20 cents, down more than 90% from their peak.

China’s government has been applying a whack-a-mole approach to contain emergent bubbles in her economy, which so far she has managed to kick the proverbial can down the road.

Yet this reminds me of the Dutch Tulip mania in the 17th century (Dutch Golden Age), where tulips once a social status symbol became the fixation of massive speculation which led to one of the first ever well-known financial panics. But of the course the dynamics today and then has been different.

The point is people respond to the incentives generated by policies.

Nevertheless all these chasing for yields are symptomatic of boom bust cycle at work.

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