The visible hand

Government announcements are still key for Chinese stocks

The visible hand

An investor waits for news of the next government press conference

Last week was one for reminiscing about former stock market glories, as far as much of the Chinese financial press was concerned.

In particular it was a celebration of “5:19”; a 19th May 1999 statement from the China Securities Regulatory Commission (CSRC) in which sweeping reforms of the Shanghai bourse were announced. The index rose 30% in the following month and investors went on to enjoy a two-year bull market.

An “unforgettable memory” is how the China Securities Journal describes 5:19 – not least because it signalled an end to a long period of market doldrums.

WiC has written previously about the volatile nature of the local bourses, as well as the role of government diktat in shaping market performance.

Michael Pettis, professor at Guanghua School of Management also points out that the domestic financial climate leaves the Chinese investor with little option but speculation.

Stock picking on the basis of fundamental value is problematic, to say the least, when the available information is so often incomplete or inconsistent. Relative value strategies (arbitraging) are difficult too. Again, the information is lacking and there are few legal avenues to short weaker performers.

So instead it is better to look for triggers that will impact on short-term supply and demand. Primarily, this means keeping an eye out for government announcements.

Indeed, 5:19 seemed to be celebrated this week less as a seminal moment for stock market reform and more as a recognition of an official announcement that led to a market boom, for example.

In fact, some see parallels with 5:19 today. Shui Pi, a columnist writing for China Times, identifies government “signalling” as key to the market’s recovery this year, especially a press conference in April in which Premier Wen Jiabao offered a bullish economic outlook.

The context is similar too, Shui Pi says. Ten years ago the CSRC was trying to counter the effects of the Asian financial crisis, as well as a series of devastating floods. This time around it is responding to the global slowdown and the Sichuan earthquake.

Certainly the government stimulus package, as well as a massive expansion in domestic credit, has improved demand for local stocks. The Chinese markets are amongst the top global performers this year. Investors brave enough to buy into the October low point of last year’s market collapse are 50% better off.

But what the government gives, it can likewise take away. The CSRC has also indicated this week that it will end its suspension of new listings on the Shanghai and Shenzhen exchanges.

The ban was initially designed to maintain price levels in the secondary market. The result? At least 32 companies were prevented from listing last year. This was bad news for local investment banks which rely on IPOs to earn fees.

But some commentators worry that a flurry of new IPOs – and there are no shortage of companies waiting to list – could lead to index falls of at least 10%. They predict investors will switch their funds into the new issues in the expectation of a higher return. Not illogical, perhaps, when you consider that the average first day trading gain on the 73 new stocks that did manage to list before the ban last year was 112.5%, according to the Securities Times.

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