The Wall Street Journal had a great story on the explosion of the Chinese equities market (sorry, subscription required).

WUHAN, China — China is in the throes of a stock-market frenzy that looks increasingly unsustainable. Chinese stocks have nearly sextupled in value in just two years and set yet another record yesterday, when the benchmark Shanghai Composite Index catapulted above 6000 for the first time.

Of course, what goes up may come down…

Big unknowns loom over the market, starting with whether China is in a bubble that’s in danger of popping. But there is strong evidence that even if the boom ends with a crash, China’s investing frenzy will also leave behind much lasting good, because it is helping build a modern, market-driven financial system.

I thought that some of these statistics covered in the article were particularly interesting.

The $3.7 trillion value of stock listed on China’s Shanghai and Shenzhen exchanges at least equals the size of the country’s annual economic output, a ratio historically seen in the U.S. This year, China’s markets have had the world’s highest volume of shares traded, and are on track to raise the most money of any exchanges through stock offerings.

and

Stock markets in China are dominated by as many as 50 million individual investors, who are responsible for about 70% of the trading. That is the reverse of Western nations, where big firms set the tone.

This last tidbit certainly suggests that the game isn’t being played by professionals. I guess that there are people who would argue that the pros can be wrong, but when the stakes are this high, I would prefer that some seasoned people who are actually paid for expertise, rather than for luck, were driving things.

As one can see from my previous posts, I’m very nervous about investing in China.  Sometimes it’s hard for me to reconcile this unease with the fact that I’ve made working with China the primary theme of my career for several years.  Like everyone else, I truly appreciate the opportunities and the possibilities in China.  I’ve put a lot of my own time and money into building up businesses around China, but I’ve always tried to maintain, at least the illusion of control.

I’m sure that investment firms that are able to cultivate insider relationships within China, that have the resources to distribute their risks broadly and that can support a lot of “feet on the street” over their to look after their investments will be very successful.  I just wonder how much chance the average individual investor has of actually investing - as opposed to flat out gambling in China.

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