Jul 3 2015 at 1:00 PM Updated Jul 3 2015 at 2:30 PM
Stockmarket is China's new gambling addiction
For China's 90 million share traders, the market is the best casino outside of Macau. But many weren't prepared for the Shanghai Composite's recent wild ride, writes Lisa Murray.
A man reacts as as market prices fall in Shanghai. The Shanghai index is down 24 per cent since its June 12 high, Shenzhen 29 per cent and ChiNext is off by almost a third. AP
by Lisa Murray
Charlie Zhang had to win the lottery before he could buy his first parcel of shares.
It was 1992 and he was walking along Nanjing Road on the way to work when he saw people selling "lottery tickets" outside one of Shanghai's most famous landmarks, the Jingan Temple.
Shut down in 1949 after the Communist Party came to power in China, the Shanghai Stock Exchange had reopened just over a year earlier. Chinese leader Deng Xiaoping had given his blessing to both the Shanghai exchange and its smaller counterpart in the southern city of Shenzhen as part of the country's economic "opening", and after a four-decade hiatus there were plenty of people lining up to take part in this new capitalist experiment.
The problem for authorities was too many buyers. Demand was high and stocks were few, causing fights to break out in the queues of would-be-investors outside the exchanges. So the authorities decided to set up a new system for buying shares.
They started selling numbered tickets, or "share purchase certificates", for 30 yuan ($6.30) a piece. If your number was drawn, you could then go into a lottery to buy shares.
Zhang bought 20 tickets outside the Jingan Temple that day. "I was lucky," he says now. "I was able to buy 1000 shares in a textile machinery company and with the money I made on those, I bought more shares."
Within three years his 20,000 yuan investment had increased tenfold and he has been in and out of the market ever since.
Zhang is just one of China's more than 90 million retail investors; they now outnumber Communist Party members. Unlike in other countries, investors like Zhang dominate trade on China's tightly controlled exchanges, accounting for as much as 90 per cent of daily turnover.
But not everyone has been at it as long as the retired tour guide. About 40 million of China's retail investors only started trading this year, and they have been on a wild ride.
Between 2010 and 2014, when China was the fastest-growing major economy in the world, its stock markets were among the worst-performing. This year, just as the economy was on track to grow at its slowest pace in a quarter of a century, the market started to rally.
The army of new traders, an expectation of rate cuts and government policy support, and a massive expansion of margin finance, helped fuel a bull market that in the 12 months to June 12 saw the benchmark Shanghai Composite Index surge 152 per cent to its highest level in seven years. The Shenzhen market was up by a similar amount, and the ChiNext, a board for high-tech firms and start-ups, almost tripled. Valuations on some stocks reached dizzying levels – the average price-to-earnings ratio of companies on the ChiNext board rose to more than 100 times – as people rushed to find the next hot stock.
But three weeks ago, the mood changed, and China's markets suddenly moved from bull to bear territory.
Over the past month, they have produced bigger swings than any other market apart from Greece, according to Bloomberg.
China in 2015 finds itself in a similar situation to 22 years ago, when Zhang stumbled across his lottery tickets outside Jingan Temple.
Despite gradual steps toward a market economy, its stock exchanges are still tightly controlled by the ruling Communist Party. Market listings involve a rigorous government approval process and mainland investors have restricted access to foreign stock exchanges. As people started to look around for investments outside the troubled real estate sector this year, there was not enough supply to meet the surge in demand, which led to irrational trading. Now investors are panicking that the party is over and rushing to cover their margin positions.
It's unclear whether the correction will turn into a crash but the recent moves have certainly served to highlight the market's flaws.
"The reason why we have irrational trading on the Chinese market is because supply is tightly controlled," says Chen Heng, an assistant professor at the Hong Kong University's school of economics and finance. "Each stock becomes something you can gamble on."
Chen points out there are fewer than 3000 stocks on domestic markets for mainland investors to focus on. "If you have 7000 or 8000 stocks then maybe the money goes to the best companies," he says. "Right now, the money is going to some bad companies."
What started out as a lottery is now perceived by many as the best casino you will find outside Macau. "I tell people investing is very dangerous," says Zhang. "Do it for fun, but don't do it to make money."
The 59-year old cashed out most of his money from the market in April to buy a two-million-yuan apartment closer to where his daughter lives. He still trades almost every day, in between caring for his young granddaughter, and is unperturbed by the latest falls.
"If I and my friends didn't have the stock market, we would be so bored."
But others have been less fortunate. A bartender in Shanghai, who prefers not to be named, told the AFR Weekend he started investing 10 years ago, when he put 100,000 yuan into the market, but he lost almost all of his money in the 2008 sharemarket crash.
SHANGHAI'S 2008 SELL-OFF 72PC
That sell-off at the height of the global financial crisis wiped 72 per cent off the market from its peak in 2007 – more than $4.5 billion. Many people lost their savings and opted from then on to keep their money in the bank or under the mattress.
However, this year, the Shanghai bartender started to hear about his trading friends making money again.
They said the rally, which came despite a slew of negative economic news, was state-sanctioned.
The government did appear to be encouraging new investors by changing the rules in April, allowing people to open up to 20 trading accounts rather than just one. At the same time, state-run media outlets published a series of positive editorials.
China's bull market "has just begun", a website run by the Communist Party mouthpiece, The People's Daily, trumpeted in April.
Government news agency Xinhua, meanwhile, offered its own explanation of the rally, after critics claimed it was divorced from economic fundamentals.
"The market, while bewildering some traders, stands as a natural reflection of the great expectations for the world's second-largest economy, which is undergoing transformation and restructuring," Xinhua concluded.
The logic appeared to be "buy now and the profits will come later". Proponents of the bull market argued that after four years of underperformance, the market had some catching up to do. Investors began basing their buying decisions on where supportive government policies would be directed next rather than on corporate earnings or business strategies.
The Nasdaq-style ChiNext outperformed because of the government's focus on innovation and the high-tech sector.
They were also anticipating more interest rate cuts and monetary policy easing was likely to boost the market. That resulted in bad economic news being cheered as it meant the government was more likely to intervene.
The Shanghai bartender joined the throng of trading enthusiasts, making an ill-timed return to the market in May with an investment of 40,000 yuan. For a month it looked like a good decision.
But since then, he and China's legion of new traders, most of whom were born after 1980, watched the markets plunge. The falls were not enough to wipe out the previous 12 months' gains but they put a large dent in investment portfolios and hit consumer confidence. Shanghai is down 24 per cent since its June 12 high, Shenzhen has shed 29 per cent and ChiNext is off by almost a third.
Last Friday, as the Shanghai Composite Index dropped by more than 7 per cent, among its worst-ever one-day performances, Guotai Junan Securities vice-president Liu Xin stood up to address a packed room at the Shangri La Hotel in Shanghai's financial district.
He immediately thanked the man sitting in an overstuffed armchair on his left. On the very same day Liu's brokerage was listing on the local market he found himself sharing a panel with one of the most senior officials at the Shanghai Stock Exchange. It was a remarkable debut – Guotai finished up by the maximum 44 per cent – and so his bow of thanks to Xu Ming, the exchange's executive vice president, was unsurprising.
Unfortunately, the rest of the market was in free-fall. The falls could have been much worse but for China's rules that halt trading in a stock when it drops by 10 per cent.
And some analysts say the market's recent declines were triggered by the Guotai IPO, which raised 30 billion yuan, making it the biggest domestic float in China for five years. That meant investor funds were diverted away from existing shares.
"It was heavily oversubscribed; and why not?" wrote J Capital's Anne Stevenson-Yang in a report. "The average return on IPOs in June has been 136 per cent, with some companies' prices rising 20 to 40 times in a matter of weeks.
"Underpriced IPOs assure an exciting launch, and the reports of instant wealth thus provided are a powerful draw for retail investors."
China has promised to change the way it manages IPOs, and that will be key to whether its markets can function rationally. The market has been hit with a flood of IPOs, around 40 a month, since the start of the year. There is speculation the government will suspend IPOs to take the pressure off.
"The Chinese administration doesn't want to see a crash in the stock market," says Hong Kong University's Heng. "They will do whatever it takes to prevent the bubble from bursting."
The government has already reduced market transaction fees and announced rules to allow its pension fund to invest in equities. In a dramatic response to last Friday's market falls, the central bank cut interest rates for a fourth time since November to a record low and reduced banks' reserve requirements.
This week, the government has even flagged that it will ease up on regulation for margin finance despite concerns the correction may be amplified because of the increasing numbers of people borrowing to buy shares. Official margin lending through securities brokerages increased 123 per cent this year to a high of 2.3 trillion yuan on June 18, according to Macquarie Research. That's equal to more than 3 per cent of China's gross domestic product, and margin lending through the "grey channel" is estimated to be at least another 500 billion yuan on top of that.
Finance companies, which don't require minimum trading balances or credit checks, have sprung up, promising to advance investors money "within seconds".
Hong Kong University's Chen believes the market will fall further. "The fundamental force driving the correction is that people are scared."
Zhang is not so sure. He reckons the Shanghai Composite Index will trade up and down within a range of 3800 to 5200 – Thursday's close was 3912.77. And then in 2018, he predicts it will go up to 10,000.
Right now, though, he concedes "it's a vegetable market". In China, stocks flash green – not red – on trading screens when they're falling.
(03-07-2015, 12:09 PM)specuvestor Wrote: [ -> ]People are talking about as if it is plan B or C... I actually think it is part of plan A. Like I said buy or sell can both be right if you know your timeline.
http://www.valuebuddies.com/thread-6353-...#pid115417
I thought the micro-managing and the authorities' reaction to the daily volatility is signalling the start of a new stage (or plan2)?
Would the CCP actually have believed in their track record of keeping the overheated housing market under wraps and became over confident as a result? In anyways, I believe the CCP have some of the most brilliant minds and very importantly, they have learnt alot from history. But generally, the seeds of the next crisis are sowed from the remedies of the last.
The great Chinese Equity Bubble debate is reminiscent of the great Oil Cash debate. We were looking for secondary effects and black swans, but so far (6-9months on), there is little fear and alot of money 'waiting' to prey on 'distressed assets'. When everyone is ready to pounce, the market just loves to throw up 'surprises'. VB perma-bears have to continue to wait.
(04-07-2015, 09:17 AM)weijian Wrote: [ -> ] (03-07-2015, 12:09 PM)specuvestor Wrote: [ -> ]People are talking about as if it is plan B or C... I actually think it is part of plan A. Like I said buy or sell can both be right if you know your timeline.
http://www.valuebuddies.com/thread-6353-...#pid115417
I thought the micro-managing and the authorities' reaction to the daily volatility is signalling the start of a new stage (or plan2)?
Would the CCP actually have believed in their track record of keeping the overheated housing market under wraps and became over confident as a result? In anyways, I believe the CCP have some of the most brilliant minds and very importantly, they have learnt alot from history. But generally, the seeds of the next crisis are sowed from the remedies of the last.
The great Chinese Equity Bubble debate is reminiscent of the great Oil Cash debate. We were looking for secondary effects and black swans, but so far (6-9months on), there is little fear and alot of money 'waiting' to prey on 'distressed assets'. When everyone is ready to pounce, the market just loves to throw up 'surprises'. VB perma-bears have to continue to wait.
I concurred with your observations... never never under-estimate China Chinese... especially the top brass... already we have witnessed what the lesser influenced have done to the tainted listed companies globally and hence this is a script that is worth watching... its free anyway especially one does not have direct interests in the fireballs...
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attachment=1322]
Adam Cheng of the classic movie: The Greed of Men must be very happy. Or rather, the director or the producer of the movie... CCP and the mainlanders are basically copying the plot where HKMA and tycoons were seen defending the HK$ under siege in the historical moment that led to the establishment of the HK$-US$ peg...
In CCP we trust...
http://www.channelnewsasia.com/news/busi...60418.html
China brokerages pledge to buy at least US$19.3b in shares to stabilise market
China's top 21 securities brokerages said on Saturday that they would collectively invest at least 120 billion yuan (US$19.3 billion to help stabilise the country's stock markets after a slump of nearly 30 percent since mid-June.
POSTED: 04 Jul 2015 15:55 UPDATED: 04 Jul 2015 16:22
BEIJING: China's top 21 securities brokerages said on Saturday that they would collectively invest at least 120 billion yuan (US$19.3 billion to help stabilise the country's stock markets after a slump of nearly 30 percent since mid-June.
A flurry of official policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, has failed to arrest the sell-off.
The rout in China's highly leveraged stock market has become a major worry for global investors, who fear a meltdown could destabilize the world's second-largest economy at a time when growth is already slowing.
The brokerages met on Saturday in Beijing to discuss the market situation and expressed "full confidence" in the development of China's capital markets, a statement on the website of the Securities Association of China said.
"Twenty-one securities brokerages will jointly invest 15 percent of net assets as of the end of June, or no less than 120 billion yuan, in blue chip exchange traded funds," it said.
The brokerages will not sell off holdings as long as the Shanghai Composite Index is below 4,500 points, the statement said.
The SSEC index fell 5.8 percent on Friday to end at 3,684 points.
Listed securities companies among the 21 brokerages, along with their major shareholders, also would proactively buy back shares, the statement said.
Beijing has been struggling to find a policy formula to restore confidence in its stock markets.
After the market close on Friday, the China Securities Regulatory Commission (CSRC) said China would cut initial public offerings and capital raisings and support long-term investors entering the market to help stabilize prices.
The People's Bank of China (PBOC) also rolled over 250 billion yuan of medium-term loans to banks late on Friday to ensure adequate liquidity in the system.
Chinese stocks had more than doubled between November and mid-June, fueled largely by retail investors using borrowed money.
Investors say constant tinkering with monetary policy and regulations to try to temper the stock market slide raises wider questions about whether China is ready to open up its capital markets and have more influence in the international financial system.
- Reuters
(04-07-2015, 05:32 PM)greengiraffe Wrote: [ -> ]Adam Cheng of the classic movie: The Greed of Men must be very happy. Or rather, the director or the producer of the movie... CCP and the mainlanders are basically copying the plot where HKMA and tycoons were seen defending the HK$ under siege in the historical moment that led to the establishment of the HK$-US$ peg...
In CCP we trust...
If follow the script for Greed of Man, you also need to borrow the 'bad luck' of dying gangsters and retired corrupt policeman. Maybe get Jiang Zemin to short the PRC markets...hahaha....
(04-07-2015, 05:58 PM)opmi Wrote: [ -> ] (04-07-2015, 05:32 PM)greengiraffe Wrote: [ -> ]Adam Cheng of the classic movie: The Greed of Men must be very happy. Or rather, the director or the producer of the movie... CCP and the mainlanders are basically copying the plot where HKMA and tycoons were seen defending the HK$ under siege in the historical moment that led to the establishment of the HK$-US$ peg...
In CCP we trust...
If follow the script for Greed of Man, you also need to borrow the 'bad luck' of dying gangsters and retired corrupt policeman. Maybe get Jiang Zemin to short the PRC markets...hahaha....
u simply won't know... the world is so confusing yet convincing...
Must stay confident...
China authority has much more means to stabilize the market, which including mobilizing private brokers and fund managers...
China curbs IPOs, enlists brokers in all-out bid to end market rout
BEIJING/SHANGHAI (July 4): China froze share offers and set up a market-stabilisation fund on Saturday, the Wall Street Journal said, as Beijing intensified efforts to pull stock markets out of a nose-dive that is threatening the world's second-largest economy.
Beijing's reported suspension of initial public offers (IPOs) came a few hours after extraordinary announcements by major brokers and fund managers, which collectively pledged to invest at least US$19 billion ($26 billion) of their own money into stocks.
China's government, regulators and financial institutions are now waging a concerted campaign to prop up the nation's two main share markets, amid fears that a meltdown would rock the financial system and inflict heavy losses across an economy where annual growth is already running at a 24-year low.
...
http://www.theedgemarkets.com/sg/article...arket-rout
(05-07-2015, 10:01 PM)CityFarmer Wrote: [ -> ]China authority has much more means to stabilize the market, which including mobilizing private brokers and fund managers...
China curbs IPOs, enlists brokers in all-out bid to end market rout
BEIJING/SHANGHAI (July 4): China froze share offers and set up a market-stabilisation fund on Saturday, the Wall Street Journal said, as Beijing intensified efforts to pull stock markets out of a nose-dive that is threatening the world's second-largest economy.
Beijing's reported suspension of initial public offers (IPOs) came a few hours after extraordinary announcements by major brokers and fund managers, which collectively pledged to invest at least US$19 billion ($26 billion) of their own money into stocks.
China's government, regulators and financial institutions are now waging a concerted campaign to prop up the nation's two main share markets, amid fears that a meltdown would rock the financial system and inflict heavy losses across an economy where annual growth is already running at a 24-year low.
...
http://www.theedgemarkets.com/sg/article...arket-rout
Unlikely to have much impact as the daily turnover during sell-off is more than 2 trillion plus. Once the panic sets in and the deleveraging starts for stocks, things start to snowball very quickly.
Would be very surprised, if the China markets do hold up on Monday, then it would prove that market manipulation by the Gov does work.