There's almost nobody out there willing to go on record as saying that the Chinese stock market doesn't look a lot like a bubble. We know it, the Chinese government knows it, and the American people know it. But, human psychology as it is, the bubble keeps sucking in more air, stretching its outer membrane ever thinner:
Xiao Feng, a former investment consultant at a futures company in Nanjing, put his three apartments and two vehicles - worth 5 million yuan - up as collateral days ago to get a 10 million yuan loan to invest in the stock market. But the cost of borrowing is high - with an annual interest rate of 25 percent, he'll have to pay the lender 2.5 million yuan in interest at the end of the year, reported the Nanjing Morning Post on Wednesday. In addition, the lender will monitor his stock trading account. If the value of Xiao's portfolio drops below 8 million yuan, the lender will liquidate his stock holdings to prevent a further decrease in the principal, spelling a loss of two million for Xiao.
I remember reading articles about people selling their extra cars back in 1999, because they thought it was a waste to have tangible assets when they could make so much fast money in the stock market. So why do they do it? I knew my recent discussion about the lottery would prove relevant.
Theresa Lo offers the following:
Call it the Lou Dobbs, War on the Middle Class phenomenon: If a person comes to believe that the American Dream can no longer be attained through hard work and savings, then why not take big(ger) risks? Go big or go home.
Friedman and Savage (1948) offered a third solution, in the context of lotteries. "Men will and do take great risks to distinguish themselves, even when the know what the risks are," they wrote (p. 299). Perhaps people trade stocks and buy lottery tickets because these offer the only [hope] of rising from the working class to the middle or the upper class. -- "Lottery Traders", Meir Statman, 2001
In other words, people may know that the odds of success are long, but this is their big chance. For millions of Chinese, the stock market offers a (remote but) tangible opportunity to vault into the upper class in short order.
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