Love is blind, and greed is insatiable. -Chinese proverb.
Investment bubbles whether they involve stocks, tea or tulips are a
fascinating study. The story of the South Sea bubble has been well chronicled
but it took place so long ago that few people can recall it with any
accuracy. Due to scant information, the investment blunders of old often
revolved around ludicrous propositions that seem obviously foolish to
us now. We tend to think that we are a little wiser today but many people
still get caught up in the quest for a quick buck. The Kubus Culture
scam, the Hamilton Airship crash, the Masterbond bust and the myriad
of cash pyramid schemes have all made their marks (or rather dents)
on South African pockets.
It seems that history simply repeats itself, for way back in the 1800’s
our predecessors often fell prey to the lure of easy money. In 1849,
Charles Mackay’s books “Extraordinary Popular Delusions
and The Madness of Crowds” chronicled events that showed how readily
investors became caught up in bubbles. With almost daily regularity,
hundreds of companies sprang up in the footsteps of the South Sea Company.
Only later, after much financial damage, were they deemed illegal and
abolished by government. During this period, the streets of London were
teeming with investors eager to get rich quick. The fraud artists of
the time realised how easy it was to manipulate a crowd and stepped
onto the bandwagon with their own versions. They, more than anyone else,
knew that the craziness that dominated the market could be exploited.
All that was needed was a place to put it and many schemes and scams
sprang into existence to oblige their manic desire.
Here is a selection of the more outlandish schemes that sought investment
funds. Their proposals usually described their aims, for example:
Trading in human hair
Insuring and increasing children’s fortunes
A wheel of perpetual motion
The transmutation of quicksilver into fine metal
Extracting silver from lead
Insuring to all masters and mistresses the losses they may sustain by
Importing jackasses from Spain
According to Mackay this was no small-scale pastime for those who wanted
to get rich quick by starting bubbles. The total amount invested in
the various schemes he estimated to be above three hundred million pounds.
For the years in question, between 1700 and 1880, that’s no small
sum. So the lesson of old should teach us frenetic activity around an
investment, good or bad often distorts the value. Investing in property
is no different.
The Chinese bubble is a fascinating account of how perception, greed
and avarice can turn even a solid investment opportunity into a financial
disaster. Research shows that the Chinese economy seems to be constituted
solely of booms, corrections, bubbles and busts. The period, which I
will be examining, is the period 1989-1994.
There are a number of similarities to our own economy that provides
food for thought. The Chinese economy had sustained very high levels
of inflation before the end of the late 1980’s, 50% in 1988, the
government was despotic and the highly publicized Tianamen Square killings
kept the smart money out of its borders. The governments ruthless clamping
down on anyone that even looked like they were going against its policies
ensured that its austerity programme was imposed with little dissent
from the populace. 1992 saw the end of this austerity programme and
resulted in increasing foreign direct investment by countries and multi-national
companies eagerly eyeing the greatest untapped market in the world.
In synch with a current leader Deng Xiaoping, who believed it was time
for a growth period in China, laws were adopted and the constitution
changed in 1993 that set the stage for the proverbial bubble.
Multi-national businesses armed with the mantra of ‘globalisation’
poured money into China. 1992 saw the emergence of 5 growth fevers,
investment, stock market fever, real estate fever, government getting
into business fever and fast growth fever. The stock market saw a growth
of 1200 % in the first 6 months of 1992. Turnover in stock exchanges
rose from $8 billion to $124 billion in 1992 and $637 billion in 1993.
A term was coined for these stocks: stir-fried stocks.
Parts of China had especially attractive factors for business, driving
a real estate boom. China had no Capital Gains Tax in 1992 and investors
flooded into the market. Some prices rose from Rmb1000 per m2 in 1989
to Rmb 14000 per m2 in 1993. Offices and apartments changed hands more
than 2 or 3 times before completion. Some people became multi-billionaires
while still only in their twenties. The 4 state banks supplied more
than 90% of all this finance.
The Chinese economy expanded by 12% in 1992 and 13% in 1993, making
it the fastest growing economy in the world, but cracks starting showing
in the economy in late 1994. Rising expenditure caused China’s
economy to grow faster than others, but it also brought higher prices.
The 3% inflation of 1990 gave way to 10% in 1992 and 16% in the first
quarter of 1993 and 20% by May of that year. From 1 January 1994 the
Chinese government imposed a capital gains tax on real estate transactions
and other tax laws suddenly saw the availability of credit dry up. This
government intervention saw a general correction in the economy.
Stir-fired stocks were just that – only good for chopsticks and
a junk food diet. Wildly optimistic projections of investors in the
Chinese economy didn’t happen. For those businesses that had tortured
the statistics until the data told them what they were looking for,
the numbers just didn’t happen. The envisaged middle class didn’t
appear. A parallel to the emerging middle class in SA can be drawn here
too. An analysis of the Chinese economy leads writer Joe Studwell in
The China Dream to conclude that the growth in the GDP was still off
a very low base of $330 per person as compared to more modest growths
in other countries, e.g. 4.1% growth in the Czech Republic saw an increase
from $3600 to $5060. This increase was 3 times that of its Chinese counterpart!
The lesson being that it is an absolute increase in spending power that
is more important that percentage growth. Is this a lesson for South
Prices plummeted, profits dried up, companies disinvested. People and
companies were left owing 10 times the value of properties in mortgages.
The bubble had burst. But as I said at the outset, China is a land of
projected opportunity and dreams and it wasn’t long before the
next Chinese bubble came along.
TIP FOR THE WEEK.
Take notice of the economy, don’t over estimate the emerging middle
class and beware of government intervention.
Read more articles on property bubbles here.