China and India are taking very different approaches to their market bubbles. China tripled its stamp duty on share purchases on the same day that India’s bourse and brokerages were celebrating its market hitting $1 trillion in capitalization. India’s strategy is conventional—most politicians fear that trying to deflate bubbles will make them the target of investor fury when the market collapses. China’s approach is more courageous and may help minimize its citizens’ losses.
Both countries are in similar economic straits. Very rapid and prolonged economic expansions have produced worrying levels of inflation and stock price surges. China’s is more impressive. Its market was up 130% in 2006 and has gained another 60% this year. While its market is small, with capitalization of only 25% of gross domestic product, it is arguably pricier, trading at 40 times historic earnings.
The Indian market, while up only marginally in 2007, has gained more than its Chinese counterpart over a longer period. Since January 2003 it is up 500% versus the Chinese market’s 300% gain. It is also larger, boasting a capitalization of more than 100% of GDP, a percentage close to some developed countries such as Japan. However, it is less turbocharged than China’s bourse, trading at only 20 times historic earnings.
Traditionally, politicians have remained silent while market bubbles have inflated. Bill Clinton said little in the 1990s and Calvin Coolidge famously held his tongue in the 1920s. The exception was during the first broad-based bubble, that of 1825, when British prime minister Robert Lord Liverpool denounced speculation, making it clear that no government bailout would be forthcoming after a collapse.
China is adopting Liverpool’s approach. Its authorities have repeatedly denounced market speculation and have taken measures to curb it, by raising rates and, now, the stamp duty. This makes sense. Allowing bubbles to inflate unchecked sucks new unsophisticated investors into a casino-like atmosphere, and allows sharp operators to relieve them of their savings for longer periods.
And the larger the bubble, the bigger the losses when it bursts. India’s economy could be damaged more than China’s, since on an absolute basis, its market is much larger. But with 100 million brokerage accounts now open in China, a collapse would affect huge numbers of mostly poor people. So China’s anti-bubble campaign may be politically savvy. Unlike the US speculators of the 1920s and the 1990s, these Chinese investors can’t say they weren’t warned.