Shanghai's Own Stock Market Rules 14 comments
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When I first moved to Shanghai in 2004, I was told by a lot of old China hands that “Shanghai is not China”. That saying has been true for most of the 150 years that Shanghai has existed. She has always been China’s gateway to the rest of the world and was usually allowed to play by her own rules. The same can also be said about the Shanghai stock market - it too seems to play by its own set of rules, though these rules seem to be more about second guessing the intentions of the Mandarins in Beijing.
When I first came to Shanghai, the equity markets were in the doldrums after one of its typical boom bust cycles; the market had sat in a narrow trading range for many months and no economic news, no matter how positive, could seem to make the market move. The market had become weighed down by the overhang of millions of state-owned shares; almost all of the listed companies had at one time been a state-owned entity. When they had gotten their initial listings, they had issued freely tradable shares but had kept back the majority of shares in the government’s hands. These shares were not tradable, but the government started to make noises about freeing these shares to trade.
This made investors very reluctant to buy shares, even in companies that were showing very good revenue and earnings growth. The thought of having a wall of previously state-owned shares hitting the market kept investors away. It took a couple of years of effort by the government, such as cancelling some state-owned shares as well as giving additional shares to private investors, to sort this out. This exercise just reinforced in the minds of investors that the performance of their investment portfolio rested on the whims of the Mandarins in Beijing.
The Shanghai stock market is once again waiting for the Mandarins. This time, investors are waiting for the government to intervene to prop up a falling market. Since it began its long decline in November of last year, the rumor had gone around that the government will ride to the market's rescue because this was the year of the Olympics and the government would want to avoid any unrest. Many grimly hung on to their stock positions as the market began its long decent, believing that the government would intervene. The Olympics are almost over and they are still waiting. Very soon, perhaps during the closing ceremonies, it will dawn on them that there will be no rescue this time. This will be when the market finally accepts reality and will reach its bottom.
At current valuations, the Shanghai Composite Index has an average P/E ratio of 19. Now this may not sound particularly high for an economy that is expected to grow at 8.6% this year, but you should bear in mind that between 2004 and 2006, when the Chinese economy was growing at 11% +, the Shanghai Composite's average P/E ration never exceeded 13 times earnings. It’s reasonable to assume that when this market does finally bottom, it may well be trading at a low double or high single digit P/E.
In the developed economies, having growth rates of 8% would mean a stock market boom, but having growth slow this much in China is going to have a significant impact on many companies. Many firms operate their businesses on razor thin profit margins; they rely on constantly growing their top line to support their business model. With growth slowing from double digits, many of these companies will no longer be able to maintain profitability and some will simply go out of business.
A period of consolidation is what this market requires. As a number of competitors fall by the wayside, the survivors will be rewarded with greater pricing power in a less cut-throat competitive environment. This process will not happen overnight; in fact, it may take a couple of years, so don’t expect the post Olympic capitulation to usher in a new bull market.
In Shanghai, they play by their own rules. In all likelihood, this market will sit range bound for sometime, ignoring good economic news as it did in the past, until the government changes the rules and sends it soaring again to unrealistic levels. Though this is the main market of the world’s second largest economy, it is still very unsophisticated. It is driven more by rumors of government interventions than by any economic fundamentals.
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This article has 14 comments:
1. there's an ongoing nationwide bust of the real estate bubble; many of the big name homebuilder's debt are trading at junk spread. we'll see a couple of them go belly up soon.
2. banks of course will be saddled with bad debts from the real estate sector.
3. concentrated unlocking of huge amount of shares are flooding the market after the "success" of the full-float stock reform. many garbage stocks will drop 80% from where they are now.
4. many stocks are still trading 30%+ premiums to their H shares listed in HK.
5. millions of mutual fund newbies bought when the index was in 4000-6000, now they are under water by 40-50%.
6. we're still far from the bottom in the US housing and stock market
7. if HK properties collapses and HK stock market goes down further, they add more downside pressure on china's properties and stock market. a lot of high-end condos in shanghai are bought up by investors from HK.
conclusion: china's stock market has a lot more downside than many foreigners think possible. be patient, you'll be able to get in when it reaches 1000 again.
shareholdersunite.com/...
the "market" takes advantage of government policies.
in the beginning of 05, the government signaled tightening on real estate and started the so called full-float stock reform. back then, your favorite merchant bank is trading at 5 RMB/share(right now it is still over 20 RMB/share, 4x p/b), about 1x p/b, 10x p/e.
smart money naturally diverted some of their windfall from real estate
to the stock market.
the reform required the locked-up shareholders to pay compensation to the float holders in order for them to get unlocked. since the float was so little and so cheap, smart money rushed into the stocks to get the windfall compensation. on average, 10 float shares got paid 3 shares(some by cash) by the locked-up shareholders. so they pushed the stocks about 30% before the payment and crashed down 30% after the payment. but after a while, the market started to forget about selling down 30% after the payment because the market started to really like the stocks.
because the economy was still in a nice up swing. so earnings kept going higher. so the market went up from 1000 to 4000.
the stupid government raised stamp duty tax to stop the mania at 4000. the market crashed, but people who haven't missed the boat couldn't stop imaging the windfall their neighbors got, so more peopled lined up to buy the mutual funds. the stupid government approved a lot of mutual funds after the crash caused by the stamp duty hike. but i think even without these mutual funds, the market would still be pushed up by retail buying because the float was still very limited. smart money had mad 5-10 times profit. the market was in full control.
so the market reached 6000 in october. as 6000 made some big institutions and smart money very dizzy, some chose to leave the market. at the same time, unlocked shareholders who promised 1 or 2 years additional lockup period in the reform contract started to unlock officially one after another. thus started the viscious down cycle.
after the market broke 5000, 4000, the stupid government started to panic and cut back the stamp duty tax. but just like it didn't do the job in the boom phase, it just couldn't make any difference in the bust phase.
now the index was back below 2500, the majority of retail investors were down 50% or more. the amount of unlocked shares are still coming to the market. smart money understand that if they push stocks up, they would be the ones holding the bags for the unlocked shares.
lately the stupid government kept talking up the sentiment for no avail because
1. the real estate bubble is finally popping; banks and steel stock look cheap on P/E. but nobody dare to buy them.
2. 50% of stocks are still very very expensive, trading at 50x P/E. stocks are still trading at over 30% premium to their H shares listed in HK.
3. unlocked shares are still coming to the market.
4. smart money wants an absolute safe price to get back in again.
5. retail investors have very little money left to put back into the money.
6. people that do have money are scared of the market.
if you think the government can pull off another bull run, you'll totally be mistaken. (unless the government wants to buy up the shares itself, that's not gonna happen!)
nobody dictates the market. the market takes advantages of the situation.
mark my post.
You have much thorough understanding about Chinese stock market than Mr. Roxburgh has.
In my opinion the biggest risk factor of Chinese economy is the very overvalued housing market. It could have effect on both domestic and global economy, for example, it could cause a serious bear market for commodities.
Would any of these facts prevent someone from making good returns investing in high-quality reasonably priced Chinese stocks? I think not. Unless I'm missing something big, there appear to be many Chinese stocks trading in the US that are attractively priced vs their growth prospects and balance sheets.
Additionally, China is assending (in many ways) so over the next 10+ years the wind will more often than not be at your back. Where as, in some more "respected" markets (like the U.S.) I think you are investing into a head wind over then next decade or so.
The current Shanghai market shares are reasonably priced. Whether the market is bottomed or not and when it will start to move up again, that is totally depends on investors sentiment (Remember there are lots of cash among Chinese investors due to extremly high savings rate of 30% of their earnings). If they loss their confidence, the market will not be UP no matter how cheap they are or whatever govt policies trying to push it up. If ordinary investors gain confidence, the market will come back any time.
I've been going to China 3 to 5 times per year since 1997. SHAGhai, BJ and SZ is not real China. I get the chuckles even from Mark Mobius and other fund managers calling in the bottom based on ridiculous last 52 week high.
Accumulated FXP from April to May. Got buy orders at $70. Plan to ride this one down to 1500 which is far from 2300 lately. That's another 30% folks.
From Epoch Times today.
en.epochtimes.com/n2/c...
The Root Cause of China's Recent Stock Market Decline
Luo Xinhui, Special to Epoch Times Aug 24, 2008
China’s stock market plummeted to a Black Monday again on August 18. The benchmark Shanghai Composite Index closed at 2319.87, down 62 per cent from its high at 6124.04 in 2007. The Shenzhen Composite Index closed at 7833.09, down 60 percent from its high at 19600.03 in 2007.
A fall like this within ten months is rarely seen in the world. According to analysts, the trading volumes of the two stock exchanges were at a record low recently. The market is dominated by caution and pessimism.
Technical and fundamental criteria can no longer be used to predict the stock market index’s performance. If this is true, then perhaps we need to analyze the actual situation of China’s stock market.
Official Explanation for the Fall
Many economic reports published by China’s state-run newspaper cited the sub-prime loan crisis in the U.S. and the roaring oil prices as the major cause of the sharp fall in China’s stock market. This is much like the National Bureau of Statistics of China’s claim in a recent economic report that the price surge in the global market was the major driving force for inflation in China. It seems that with today’s economic globalization, problems in China’s stock market have a lot to do with global economics.
However, the United States, the source of the sub-prime loan crisis, only had an 11 per cent drop in the Standard and Poors Index, whereas China is the country that has suffered the greatest loss in stock market value in the world. Does the U.S. sub-prime loan crisis have the greatest impact on China’s market?
When oil prices soared, the stock market declined in countries that rely heavily on oil. However, Europe and the U.S. have never exceeded an 11 per cent loss in value. Does the oil price also have the greatest impact on China’s market? Besides, oil prices have already started to decline recently, yet China’s stock market continues to fall. Why did this happen?
It is generally recognized that tightening monetary policy by China’s Central Bank to prevent inflation is a domestic factor that caused the sharp fall in China’s stock market. Nevertheless, despite the Central Bank’s many increases in interest rates, the interest rate on people’s savings accounts is still negative compared to inflation. Under such conditions, as long as the market is stable, capital should still enter the stock market. In addition, capital liquidation is still high in the domestic capital market.
A Lack of Confidence
Recently, the Chinese government apparently realized this also, and has repeatedly emphasized that the stock market plummeted due to investors’ lack of confidence.
What the government said was right, about confidence. But the lack of confidence is the “consequence” instead of the “cause.” What should investors’ confidence be based on? How did investors lose confidence? I think the performance of the stock market in recent years should have indicated this to investors. Accordingly, whether it was the prediction of a future strong market, as claimed by high level officials and media; or even the renowned Chinese economist Wu Jinglian, who held the view that China’s stock market would suffer a great loss, but recently emphasized the sensibility of rescuing the market—the stock market simply did not react positively to any of these statements and continued to plunge. Over 90 percent of investors have lost money.
Other commonly mentioned factors are, for example, lifting of ban of non-tradable shares and Ping An Insurance’s plans for massive stock and bond offerings. These are not normal factors in the first place. Instead, these are a direct intervention of administrative power, which has caused the stock market to fall. Who approved these plans? Who made the decisions? Without the consent of the Securities Regulatory Commission, would China’s Ping An Insurance announce its massive offering plans on its own? And those unusually high IPO prices of some companies—can this happen without the consent of the Security Regulatory Commission?
The Truth about China’s Stock Market
The truth about China’s stock market is actually not a secret, and most investors probably already knew it. That is, China’s stock market is a tool used by the government to re-distribute and re-organize social wealth on a grand scale, which means that it is a tool to clean out Chinese people’s savings accounts. The biggest winners in this process are, of course, government officials and their relatives who are the most well-informed about the actual value and re-organizing plans of those that control state wealth; as well as institutional investors who collaborate with them and who rely on insider tips to control the stock market. Those people have already made huge fortunes in the process. This is the truth about China’s stock market.
Actually, the goal of China’s stock market was not purely an economic one when it was originally established. When former Premier Zhu Rongji set up stock market in Shenzhen, he said that China’s stock market was meant to get money--to get money in the market and give it to companies that were unable to get money, and because these companies were unable to make money, they needed monetary support.
In Western countries, a fundamental criterion to allow a company to be listed is that the company must have performed well for at least three years while meeting other standards. The company must obtain approval from the Securities Regulatory Commission prior to issuing stock. Under supervision, the issued stock can also be pulled from the market to ensure and safeguard in particular small and medium sized investors.
China’s stock market has been established to operate like an ATM for the listed companies. For the majority of the listed companies, economic reform is nothing but a mechanism to trap money. Many heavily indebted State-owned companies have been listed in the stock market after re-packaging. All of a sudden, they become the new stars in the market with easy loans and finance. Chen Yea-Mow, Professor of Finance at San Francisco State University indicates, “The Chinese listed companies’ profiles are questionable. In fact, the truly good and strong companies are rare in the Chinese stock market.” The foundation of a stock market is the listed companies. With a weak foundation, how can any high stock price be affordable? The deflation in stock prices is therefore predictable.
Other than the fact that the listed companies would benefit from the weak structure in the Chinese stock market, the true “beneficiary” of this contrived structure is the “interest group” who would profit from the initial establishment of a listed company and the trading thereafter. As for the investors, China’s stock market serves to mentally “entertain and exercise” them. It gets investors far more emotionally involved than any intellectual game could hope to.
In an interview after the market dived for several days prior to the Olympics, economist Tang Min points out that, “No economists can make sense of China’s stock market.”
“I’d advise the investors to give up the illusion that the government would restore the stock market or that the market will rebound. Escape China’s stock market while you can. If you insist on trying to profit from it, go ahead. However, do not complain if you are drained empty.”
Some say that entering China’s stock market is like gambling. That would be over-estimating the capacity of the Chinese stock market. Gambling relies on luck, and sometimes strategies—it still has fairness in it. However, China’s stock market is a manipulated and systematic black market. The majority of Chinese investors seem to have gradually recognized this. This could suggest that the end of this massive robbery is near.
Can China’s Stock Market Be Independent of the Government?
Since the fall of China’s stock market, investors have been very disappointed in the government for not rescuing the market. Some investors complain that when the U.S. stock market fell 10 per cent, the U.S. government invested 200 billion dollars to save the market. However, China’s stock market has fallen nearly 50 per cent, and yet, the Chinese government has taken no action. According to Chinese Finance magazine, “China’s stock market cannot, could not, and should not be saved.” This might be consistent with the ideas of many experts and economists, that is, it is better for the government not to intervene in the market. However, can China’s stock market truly be a market independent of policy and the authority (administrative power)?
This is a challenge to the current system. First of all, the major and powerful players of the listed companies in China’s stock market are so-called State-owned businesses. According to the Chinese legislature, the State Council is the ultimate representative of the State-owned properties. But, both the China Securities Regulatory Commission and the China Banking Regulatory Commission are agencies under the umbrella of the State Council. This is like a football game where the government is both the referees and the athletes. Furthermore, the government is also setting the rules and changing the rules. Who would believe that independence or fairness in the stock market will ever exist?
Secondly, many influential economists in China are also the independent directors of many listed companies; some are even connected to the company financially. Many CEOs of major listed companies and funds are also members of the Securities Commission, Exchange Commission, and other government agencies. How can China’s stock market remain untainted from these complicated and complex relations and prolific insider trading, pushed stock prices, and administrative manipulations harbored in the system?
Furthermore, a significant factor of a capital markets is fairness, which is ensured by the free flow of information, and relies on media freedom. In China’s stock market, analysts serving in the media are those who pass the official qualification exam. Those who don’t “obey” will have a hard time passing such an exam. Moreover, there are rules to follow in the Chinese media. The analysis must comply with those rules. Didn’t CCTV’s economy program get shut down because of a few “honest” words? Ordinary shareholders can do nothing but follow the rules. It would be a miracle if the shareholders did not end up losing money.
Shi Hanbin, a Shanghai finance expert said, “However, I hoped the August 8 Olympic Opening Day would save the market.” I have said it before: “Always analyze based on the true interest, discard any expectation, and stay completely cold-blooded to maintain a complete calm. Obviously, I have not reached that level myself. I have ignored a key factor: The atheist [cadre] knows no limits.”
Shi’s sentence might be the most fundamental answer to the current market’s situation.
china life for example, in spite of a fall from 60 to 25, is still up 150% from about two years ago. i suggest you to examine its earnings history to see whether this company has suddenly improved its business by 150% for real over just 2 years!
the best growth period of china mobile is over. so watch out from below for china mobile too.
i bet HK will go to 15000, china mobile 75, china life back below 20!