China’s stock market performance so far this year seems to be reliving past glories, if current conditions are anything to go by. In the fortnight leading up to the annual meeting of the National People’s Congress, over 876,000 new broking accounts were opened. The country’s two domestic bourses (one in Shanghai and another in Shenzhen) have racked up gains of close to 15% in 2009 – all the more impressive when most other international indices are disappearing fast in the opposite direction.
Chinese equities have often seemed independently minded, and dramatically so when almost identical shares in mainland companies (A-shares) often sell at a premium to their Hong Kong cousins (H-shares). In part this is because the investment alternatives available locally are limited, due to restrictions on setting money to work overseas. But the current run up in equities also reflects the frenetic intensity of much of the Chinese stock buying mentality. Cantonese slang for day trading is chao gu (stir-frying stocks) and this seems a reasonable analogy for the sizzling short-termism of many of its practitioners.
But 2009 has been a good year so far for the mainland’s stock pickers. The flipside to all of this is that performance on the same markets last year was just about the world’s worst. The local bourses fell 65% from their peaks, after an extended period of full feasting had seen the market climb nearly six-fold to an historic high of more than 6,000 points in October 2007. This followed on from an earlier famine; a four-year bear market which concluded in the third quarter of 2005.
In 2007 white-collar employees, retirees and housewives all plunged in to the market, with hundreds of thousands of new stock-trading accounts opened each day. Few predicted the following year’s meltdown as locals were confident that their government would not allow the market to fall during Olympic year. They turned out to be wrong, and many of those relying on notions of sporting patriotism were for the metaphorical high jump. The Chinese bourses saw a sell off averaging 5% a week for five consecutive weeks.
Michael Pettis, a professor at Peking University’s Guanghua School of Management, says that events confirmed two key trends. The first is the inherently speculative nature of stock picking in China. Fundamental analysis is tough when accurate data is lacking, and is less reliable anyway when corporate governance and regulatory frameworks leave so much to be desired. Policymakers in supposedly more sophisticated jurisdictions are coming to similar conclusions. But overall this means that the China’s markets go through bandwagon bursts of activity, as investors try to ride on market momentum.
They are also looking to second-guess government activity as a basis for much of their trading strategy. Hence the more recent run-up fuelled by the Rmb4 trillion stimulus package. Although it seems that the government is far from happy withcorporate executives now stock-picking with the proceeds of cheap debt currently on offer from the state banks, the underlying sense is still one of the government stepping in to prime the markets again.
In fact, one of the proposals to be aired at this year’s National People’s Congress would offer further fillip. Fan Fuchun, a member of the CPPCC National Committee and vice chairman of China Securities Regulatory Commission, told media that the dividends tax might be abolished. Fan thinks this will boost investor confidence and make funds available (from dividends) for reinvestment.
Such a move would count as another of the government’s variegated stimulus measures. A rising stock market should help to spread confidence through the economy as a whole. It could also open up the capital market to new equity issuance. Around $40 billion could be raised in China IPOs this year, Reuters reports
On a long view, the Chinese stock market should track the country’s phenomenal economic growth, and therefore rise (Jim Rogers waves the flag for this view). But should China fail to hit its much-discussed 8% growth target this year, sentiment in the stock market could well be the first victim.
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