Black mood

Buyback plan: Guo Shuqing

Black Monday has been used a number of times in stock market history to describe cataclysmic events. Most famously there is October 19, 1987, when the Dow Jones Industrial Average posted the largest one-day decline in its history, a staggering 22.6%. There was another Black Monday in 1929, which followed the Black Thursday that started the Wall Street Crash.

So it might seem something of a overreaction for 21CN Business Herald to use the ‘black’ moniker to describe Monday August 27 as a dismal day for the A-share market. After all, the Shanghai Composite only dropped by 1.8% – enough to push the market down to a new three-and-a-half year low, yet hardly a spectacular decline.

Perhaps it was more the cumulative effect of months of price declines that darkened 21CN’s mood. No single catalyst has been picked out for blame, either. Analysts seem divided: some point to weak manufacturing data, others to unimpressive earning reports, and some to a lack of clarity over government economic policy as the “hard landing” debate goes on.

Whatever the reason, the Shanghai Composite has seen a prolonged decline – losing 37.3% of its value since the beginning of 2011. It continues to underperform markets across Asia and – of the 54 international markets tracked by the Financial Times – only Russia and Venezuela have lower price-to-earnings values.

Such dreadful performance has not escaped the government’s attention. The China Securities Regulatory Commission, now run by former China Construction Bank chairman Guo Shuqing, has spent most of the year trying to restore confidence in the market via a wide range of measures, including allowing more foreign capital into local stock markets, as well as encouraging listed companies to pay out more in dividends.

More recently the CSRC has also been suggesting that companies reward shareholders with share buybacks and state-owned Baosteel Group has obliged with a Rmb5 billion buyback along these lines last week. China’s biggest steelmaker said it would buy one billion shares for up to Rmb5 a share, a 22% premium to the price on the day the deal was made public.

Baosteel stock (unsurprisingly) soared, finishing the day 10% higher (the maximum that a share price can increase during a single session). More companies are expected to conduct similar deals.

So will buybacks help to lift the morose mood? Perhaps not. “The market, which is mainly driven by economic expectations, is still under pressure,” Xiang Weida, chief analyst at Great Wall Securities told China Daily. The slowing economy has taken its toll on corporate profitability, making many companies less attractive to investors. In the first half of the year, corporate earnings in the MSCI China Index grew by just 2%, compared with 10% in the last half of 2011 and 29% in the six months before.

Still, some believe the worsening profit trend may have bottomed out. HSBC thinks that MSCI China companies will grow their earnings this year by 5%, for instance. The bank expects “earnings growth to stabilise and rebound, as policy easing measures filter through”.

The test is whether improved profitability can overcome the deeper lack of confidence currently haunting China’s stock markets.

In the meantime, investors are looking farther afield in search of returns. Aside from more established markets, the nascent bourse in Cambodia is also attracting Chinese capital, even though it has only one listed company – the Phnom Penh Water Resources Bureau. When the firm listed earlier this year, more than 100,000 of the shares on offer were snapped up by Chinese investors or people of Chinese descent.

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