China - Main index touching 8 year lows, is this the moment to enter?

Discussion in 'Economics' started by CN2000, Jul 12, 2005.

  1. CN2000


    This post as a clear objective: to understand if this is the right moment to enter the Chinese equity market. Before I do that, lets us see what happen during the past 15 years on China's stockmarket.

    The SHGSE (Shanghai Stock Exchange) and SHZSE (Shenzhen Stock Exchange) stockmarket was opened in December 1990. It was a fundamental step on Deng Xiaoping's free-market reforms started in 1979.

    After all the excitement, few companies actually issued shares in 1991, share prices moved little and the public remained largely suspicious of this new commodity.

    The trigger came in January 1992. Deng Xiaoping made a series of high-profile calls for rapid economic growth, increased investment and experiments with shares. As news of his call to reform leaked out people ran to buy shares. Stockmarket fever broke out and thousands discovered that fortunes could be made (and lost) through share trading.

    Deng's call sparked as well a mass issuance of shares throughout the country and by late 1992 this was throwing the economy out of balance. With the collaboration of local leaders companies were issuing as many shares as wanted. Simultaneously, bank lending also increased rapidly, again sponsored by local leaders anxious to make a quick profit in the wake of Deng's call.

    In Beijing the PBOC (People's Bank of China) were worried with the increase on money supply and a consequent raise of inflation. Party leaders were also worried that the stockmarket fever will quickly lead to the mass privatization of Chinese industry.

    In August 1993 the PBOC's head, Zhu Rongji (at present China's Premier), launched China's first comprehensive plan for economic reform. Credit quotas were reduced and local party and bank officials threatened with the sack if they failed to rein in local bank lending and stock issuance. Share categories were created and rigidly enforced. Any SOE (state-owned enterprise) converting into shareholding company would now have to divide up its share capital into three parts:

    - 1/3 of shares can be publicly issued, owned by individuals and LPs (legal persons, which are either companies or social entities with independent legal status) and freely traded. These shares are known as individual person or IP shares.
    - 1/3 is made up of state shares. The ultimate owner is the State Council and they are not freely tradable.
    - Legal person shares, or LP shares, make up the final third. Only LPs can own them. They cannot be traded on the stockmarket, although they can be transferred between LPs.

    This shareholding structure meant that the state remained the dominant shareholder of any restructured SOE.

    China's first bout of share fever was short-lived. During late 1994 and 1995 the central government tightened the share issuance quota and consequently share issue volumes slumped. If 1993 had a record high of $518m worth of IPOs (Initial Public Offering) 1994 and 1995 only generated $193m.

    During late 1995 and 1996, local officials in Shenzhen and Shanghai introduced policies that encouraged a rapid increase in trading volume and speculation. They offered preferential tax rates and bank loans to listed companies, spoke of allowing foreign investors into the market, fought aggressively for new listings, improved services for investors and downplayed regulation. Trading volume at the SHZSE exploded from $46m in 1995 to $590m in 1996. Share prices soared on the back of massive speculation. Huge sums of bank deposits were illegally lent to securities companies and invested in shares, all with the implicit approval of the authorities in Shenzhen and Shanghai.

    The central government responded once more. In December 1996 an editorial in the People's Daily rumoured to have been written by Zhu Rongji himself, spoke of share prices as "abnormal and irrational". The State Council sent investigative teams to both cities. Once several scandals broke in the summer of 1997, more people were sacked or became scapegoats. However, this time it was not just the people who were reorganized, it was the institutions of regulation too. The CSRC (China Securities Regulatory Commission) was given the powers it needed and other government organs, including the POBC and local governments, had their regulatory powers taken away.

    With the CSRC in charge, between 1997 and 2000 the focus was on increasing the supply of funds to the SOEs. In 2000 alone, 139 companies raised more than $25,000m from share issues (IPOs, rights and secondary offerings) and the market expanded in size by 50%. Trading volume increased 94% over 1999. By the end of 2000, however, the strains were beginning to show. Regulators were concerned over stratospheric price-earnings multiples, and growing number of scandals were revealing the corruption at the heart of listed companies' accounts as well as the manipulative schemes of large investors. The dramatic increase in share prices in 2000 was not sustainable. New policy priorities, including privatisation, creating a modern pensions system and reducing government debt, were coming to fore, forcing policymakers to re-evaluate the role the stockmarket should play in their reform strategy.

    As a result, during 2001 policy appeared to shift. The bubble inflated during 1999-2000 burst in the second half of 2001 and the CSRC began its most serious crackdown yet on illegal activities. An it was not only this that investors had to deal with. The central government rolled out a plan to reduce the government's shareholdings. The result of these two moves in 2001 was dramatic and immediate: a 38% decline over 2000 in trading volume. 2002 gave little signs of recovery. The total stock turnover was 27% less than in 2001.

    From 2003 until now, the downward trend started in 2001 accelerated. The Shanghai Composite Index (in yahoo as SSE Composite Index - Shanghai:000001.SS) was under 1500 points most of the year 2003. The first quarter of 2004 was marked by a rally until 1800 points but during the rest of the year and until June 2005, the downtrend ruled. The lowest mark was set recently at 1004 points.

    To be continued...
  2. What did Confucius say about man who to try to catch falling knife?
  3. If you are not careful, the knife could land on your head? :D
  4. If anyone in their right mind read that article, I don't think they would even want to waste their time reading what "more to come".

    Stay away from corrupted communist states.
  5. Last time I checked, only chinese citizens are allowed to own any substantial shares of a chinese firm and I've also heard that none at all for certain companies. The communist government does not allow foreign controlling ownership of any state run/owned company. Which means pretty much every company and/or organization in communist China.
  6. KevinK

    KevinK Guest

    As they say, I'll wait for it to bounce off the cutting board :D
  7. Besides China being a bubble waiting to deflate, the problem with their stock market is that it is a not a real stock market when you have communist regulations. The Chinese citizens were forced to buy stocks years ago and then all got burned.
    Ever since then, there is no real interest in the Chinese market, the "traders" over there are retired folk who come into the office for the AC.
    It seems mostly market mechanics so I'm guessing if they ever lift the idiotic regulations and I am not talking about the restricted foreign participation.
  8. Keep away from Shanghai and Shenzhen stocks. The majority of the stuff listed in both exchanges are crap. Regulations on new IPOs have hampered both exchanges.

    On the other hand, I am sure that there are better Chinese related red chips listed in Hong Kong. This is where most of the IPOs are being listed.
  9. What's hot? China is! With GDP growth of 8-10% a year, you would think that their markets are just booming, right? Better get in now before you're priced out of the market with whatever you have left over after refinancing your home.

    So, go ahead and buy one of the new china ETF's - you have your choice of FXI which tracks the SHGSE & SHZSE Xinhua 25 or buy PGJ which has most of the same companies but limits it to US ADR's.

    So, let's see:
    PGJ down 5.76% since inception but was down as much as 16.8%
    FXI down 1.5% for the year. Up 6.4% since inception.

    If the US GDP was rising at 8% p.a., do you think the dow would be dropping?

    It seems to me that the game is not being played the same. I am seriously questioning whether any non-direct china investment will play out at all. I'd love to put my money in now, but I could see china owning half of the US and these indexes remain the same.

    RMB revaluation? What planet are you living on?
  10. CN2000, thanks for the info. I've also been a bit puzzled with the performance of Mainland China's stocks (never looked much into it, just watching the index for the last 5yr).

    Am I correct to assume you wrote this yourself and you have first hand knowledge of things (i.e. live in China)?

    China is a major trading partner, both for EU and US, but I think I understand very little about it.

    And problem with relying on "establishment" media in the West for info, it's hard for me to separate facts from (deliberate) misinformation (i.e. propaganda).
    #10     Jul 13, 2005