17-07-2015, 10:26 PM
Why the Chinese stockmarket shock doesn’t really matter
THE AUSTRALIAN JULY 18, 2015 12:00AM
Rowan Callick
Asia Pacific Editor
Melbourne
Here are 10 lessons from the recent sharemarket Great Fall of China.
1. As long as you don’t personally hold stocks there, don’t panic now, and in sunnier times, don’t exert yourself to cheer. It doesn’t signify much — maybe nothing at all — for the rest of the world.
China’s stockmarkets in Shanghai and Shenzhen are not linked with the real economy, either in China or in the wider world. They have often been branded as casinos. The markets, which opened in 1991, climbed slowly in total capitalisation up to 2000, then fell backwards, even after China’s accession to the World Trade Organisation provided a huge boost to business. They soared steeply in 2007, just as the global financial crisis struck virtually all other equity markets, then fell back again, stumbling along until the recent scorching run started in 2014. They doubled in value in the year up until their correction a few days ago, even as China’s gross domestic product slowed. Interest rate cuts don’t affect these markets, of course — they fell on June 29, the first trading day after rates were last cut.
2. Despite their recent angst, the retail investors who dominate the market — accounting for 80 per cent of trading volumes — will continue to bet on stocks, because of the lack of alternatives. The banks — virtually all state-owned — offer a return of just 3 per cent, in an economy slowing but still growing at 7 per cent.
Increasing barriers are being thrown up by the government to limit retail investment opportunities in real estate, to prevent reflation of the bubble there. Despite its reputation as a casino — an institution where all the punters ultimately lose — the sharemarket has provided a highly respectable mean return of about 15 per cent per year. This domination of the Chinese markets by individual investors has been reinforced by Shanghai-Hong Kong Stock Connect, the cross-boundary investment channel which began operating late last year.
3. When the going gets tough, China’s party-state gets going. The ruling communist party — these days personified through its leader Xi Jinping — claims for itself the credit for all the developmental successes of the hardworking Chinese people. Only recently, investors whooping it up branded it “the Uncle Xi bull market”.
But when the investment climate turns bad, the leadership understands that it also then cops the blame. Its core answer is simply to prevent that happening in too serious a manner, to put a floor in place. And so it looked, not for the first time, to its special administrative region of Hong Kong for inspiration when the market slumped by 30 per cent through the week to July 12.
In response to the Asian financial crisis that started in 1997, the Hong Kong government aggravated market liberals by buying stocks worth about $US15 billion, and later selling them down steadily to realise a considerable profit. The China Securities Regulatory Commission a fortnight ago ordered the country’s top 21 securities firms to contribute about $26bn towards a $56bn fund to buy exchange-traded funds linked to blue chips.
4. Investors have little interest in traditional metrics like price-earnings ratios. The mean p/e ratio at ChiNext, the small-cap board, recently soared past 90, more than double that of American internet stocks during the dotcom bubble at the turn of the millennium.
That didn’t faze anyone in China, it seemed. Company performance doesn’t matter too much either. Instead, investors tend to watch for government policy announcements, and especially for signs of fresh stimulus spending.
The ultimate goal is insider information, of course, or even merely rumoured inside dope.
5. Dividends are mostly small, and few investors take any note of them. They are also taxed, while capital gains are not. The entire focus of investors is on identifying triggers that drive price, not on yields — on trading and churning, rather than on holding stocks in the anticipation of longer-term gains.
6. Most of the 20 million or more middle class Chinese households that are retail investors will have lost, for now, some of the value of the smaller stocks they tend to favour, because the potential for rapid upside is perceived as greater. But the liquid, large-cap stocks — virtually all of them still state-controlled, with only minority stakes floated — did not fall nearly so far. As a demonstration of this, the Shanghai 50 index has overall massively outperformed the broader Shanghai Composite.
7. The biggest market gains for these large-cap shares have mostly come on listing. Typically, the big state-owned corporations that have been floated have presented massive stagging opportunities to the “lucky” — usually well-connected — individuals and families who have happened on access to the shares at the issue price, mostly bought with cash forwarded by the state-owned banks.
8. It’s much safer to invest in the bigger government-owned blue chips than in private companies, however promising the latter’s IPO prospectuses. But the sharemarket’s valuations don’t act as disciplinary tools. For the most part, the blue chips do not rely significantly on the market to raise funds, preferring to use their own cashflows or bank loans, the latter relying heavily on their political clout. Instead, they use their equity status more as a demonstration to their government owners of their capacity to submit effectively to the heightened, more globally-aligned compliance requirements of the market regulators.
9. The Chinese markets are probably already buying opportunities. Xi wants to be the bull emperor again. He wants to boost consumption.
He wants to make it easier for Chinese firms to raise capital without relying on his overburdened state banks, and he has said in the past that he wants greater marketisation of the economy overall, although that latter course has been more wayward.
10. Notwithstanding this, unless you are the fortunate beneficiary of inside information, as an intimate of Chinese decision-makers … maybe better to brush up on your poker skills or on that form guide.
THE AUSTRALIAN JULY 18, 2015 12:00AM
Rowan Callick
Asia Pacific Editor
Melbourne
Here are 10 lessons from the recent sharemarket Great Fall of China.
1. As long as you don’t personally hold stocks there, don’t panic now, and in sunnier times, don’t exert yourself to cheer. It doesn’t signify much — maybe nothing at all — for the rest of the world.
China’s stockmarkets in Shanghai and Shenzhen are not linked with the real economy, either in China or in the wider world. They have often been branded as casinos. The markets, which opened in 1991, climbed slowly in total capitalisation up to 2000, then fell backwards, even after China’s accession to the World Trade Organisation provided a huge boost to business. They soared steeply in 2007, just as the global financial crisis struck virtually all other equity markets, then fell back again, stumbling along until the recent scorching run started in 2014. They doubled in value in the year up until their correction a few days ago, even as China’s gross domestic product slowed. Interest rate cuts don’t affect these markets, of course — they fell on June 29, the first trading day after rates were last cut.
2. Despite their recent angst, the retail investors who dominate the market — accounting for 80 per cent of trading volumes — will continue to bet on stocks, because of the lack of alternatives. The banks — virtually all state-owned — offer a return of just 3 per cent, in an economy slowing but still growing at 7 per cent.
Increasing barriers are being thrown up by the government to limit retail investment opportunities in real estate, to prevent reflation of the bubble there. Despite its reputation as a casino — an institution where all the punters ultimately lose — the sharemarket has provided a highly respectable mean return of about 15 per cent per year. This domination of the Chinese markets by individual investors has been reinforced by Shanghai-Hong Kong Stock Connect, the cross-boundary investment channel which began operating late last year.
3. When the going gets tough, China’s party-state gets going. The ruling communist party — these days personified through its leader Xi Jinping — claims for itself the credit for all the developmental successes of the hardworking Chinese people. Only recently, investors whooping it up branded it “the Uncle Xi bull market”.
But when the investment climate turns bad, the leadership understands that it also then cops the blame. Its core answer is simply to prevent that happening in too serious a manner, to put a floor in place. And so it looked, not for the first time, to its special administrative region of Hong Kong for inspiration when the market slumped by 30 per cent through the week to July 12.
In response to the Asian financial crisis that started in 1997, the Hong Kong government aggravated market liberals by buying stocks worth about $US15 billion, and later selling them down steadily to realise a considerable profit. The China Securities Regulatory Commission a fortnight ago ordered the country’s top 21 securities firms to contribute about $26bn towards a $56bn fund to buy exchange-traded funds linked to blue chips.
4. Investors have little interest in traditional metrics like price-earnings ratios. The mean p/e ratio at ChiNext, the small-cap board, recently soared past 90, more than double that of American internet stocks during the dotcom bubble at the turn of the millennium.
That didn’t faze anyone in China, it seemed. Company performance doesn’t matter too much either. Instead, investors tend to watch for government policy announcements, and especially for signs of fresh stimulus spending.
The ultimate goal is insider information, of course, or even merely rumoured inside dope.
5. Dividends are mostly small, and few investors take any note of them. They are also taxed, while capital gains are not. The entire focus of investors is on identifying triggers that drive price, not on yields — on trading and churning, rather than on holding stocks in the anticipation of longer-term gains.
6. Most of the 20 million or more middle class Chinese households that are retail investors will have lost, for now, some of the value of the smaller stocks they tend to favour, because the potential for rapid upside is perceived as greater. But the liquid, large-cap stocks — virtually all of them still state-controlled, with only minority stakes floated — did not fall nearly so far. As a demonstration of this, the Shanghai 50 index has overall massively outperformed the broader Shanghai Composite.
7. The biggest market gains for these large-cap shares have mostly come on listing. Typically, the big state-owned corporations that have been floated have presented massive stagging opportunities to the “lucky” — usually well-connected — individuals and families who have happened on access to the shares at the issue price, mostly bought with cash forwarded by the state-owned banks.
8. It’s much safer to invest in the bigger government-owned blue chips than in private companies, however promising the latter’s IPO prospectuses. But the sharemarket’s valuations don’t act as disciplinary tools. For the most part, the blue chips do not rely significantly on the market to raise funds, preferring to use their own cashflows or bank loans, the latter relying heavily on their political clout. Instead, they use their equity status more as a demonstration to their government owners of their capacity to submit effectively to the heightened, more globally-aligned compliance requirements of the market regulators.
9. The Chinese markets are probably already buying opportunities. Xi wants to be the bull emperor again. He wants to boost consumption.
He wants to make it easier for Chinese firms to raise capital without relying on his overburdened state banks, and he has said in the past that he wants greater marketisation of the economy overall, although that latter course has been more wayward.
10. Notwithstanding this, unless you are the fortunate beneficiary of inside information, as an intimate of Chinese decision-makers … maybe better to brush up on your poker skills or on that form guide.