Similarly, there is a plausible argument behind the current surge in China's equity markets. True, the CSI 300 index of leading stocks traded on the Shanghai and Shenzhen stock exchanges has leapt 39 per cent in the past 10 weeks and is now 90 per cent higher than at the end of October. Even so - and in contrast to equity indices in the developed world - the CSI 300 remains well short of its record high. At 4,522, it is still 22 per cent below its peak of October 2007. So maybe the price surge is a catch-up exercise with the developed world's markets rather than a bubble being inflated.
In addition, the rating of CSI 300 shares still leaves much to go for. Currently, the index trades on 31 times the weighted average of its normalised earnings. That may sound high, though the bulls could probably concoct a plausible explanation of how accounting technicalities meant that earnings of Chinese companies were especially low (therefore the 'high' PE ratios were illusory); some such fiction was used to justify Japanese companies' share ratings in the 1980s. Besides, the CSI index's present earnings multiple is far below its all-time high (75 times in 2001) and even below the average for its entire history (32 times, including back-dated data from 1999 to 2005).
Despite this, it is obvious that Chinese companies, on average, are not 90 per cent more valuable than they were six months ago. Something else must be happening to make investors, speculators and punters bid up prices to the extent they have.
Ironically, that 'something else' has more to do with factors that will restrain company values in the long run - ie, the uninspiring state of China's economy. The latest data shows economic growth at its slowest since the world sank into the financial crisis of 2009. In the first quarter of 2015, China's nominal output was just 5.8 per cent more than a year earlier and, stripped of price deflation, output was 7 per cent higher.
That sort of pace may be the new normal we have been told to expect from the world's second-biggest economy. Even so, it will take some getting used to. After all, less than three years ago, the International Monetary Fund still expected China's output to grow by 8 per cent a year until 2018. By last autumn, the IMF had hacked back its estimates to 7.1 per cent growth for 2015 and, in its latest World Economic Outlook, published this month, the quasi global central bank reckoned output would grow by just 6.8 per cent this year and 6.3 per cent next.
The fear has to be that further slippage in growth rates may prompt the erosion of asset values - especially property values - that would precipitate a full-scale financial crisis. Thus, for months China's authorities have responded with looser monetary policy. This seems to have had little effect on property values - house prices keep falling, for example - but it is no coincidence that the price of financial assets - especially shares - has leapt.
The latest move is that the People's Bank of China - the central bank - has trimmed the 'required reserve ratio' for commercial banks. Tinkering with reserve ratios is a simple tool of monetary policy that western central banks rarely use because it causes so many distortions that it becomes self-defeating. However, China's banks were required to keep cash equal to 19.5 per cent of their reserves in their vaults (an enormous proportion, dictated by the need to neutralise the inflationary effects of China's massive trade surpluses). That ratio was cut by a percentage point this week, freeing up about £140bn of cash for 'high-powered' lending that - depending on demand - could ripple several times through the economy.
The usual presumption is that the extra credit will first boost asset prices. But, after an initial burst of enthusiasm on Monday, the CSI 300 closed 3.2 per cent down on its high of the day. That was quite a drop, although there is no telling if it's a sign of growing realism. Whatever, investors who have profited from this bull run must adopt one of two perspectives.
Either they stick with China's equities come what may, so remain phlegmatic if and when prices crash. After all, that's what is expected from emerging markets - a volatile yet ultimately profitable ride. Alternatively, they set a tight stop-loss from the current level and exit when the sell signal is triggered. Whoever follows that course locks in profits, which is good, but gets locked out of the market, which may be bad. From this, it follows that using stop-losses may be best for those whose investment horizon is short - the losses they avoid are likely to exceed the gains they forego. For the long termers, the phlegmatic approach may be best - China's equity markets are likely to be as irrational as any, yet stand a better than average chance of delivering the goods eventually.
