After last week's correction by 20 percent downward of the Chinese stock markets, the nay sayers seemed to be leading the attack. From Singapore Bloomberg guestimated that the Chinese stocks were 65 percent overvalued, of course compared to the stocks in Singapore. But it looks that the increased unproductive hours in China - because staff has to follow the stock market during working hours - might still not disappear.
The Shanghai Foreign Correspondents Club organized on 12 June a discussion with Peter L. Alexander, principal at Z-Ben Advisors, a consultancy working for mutual funds. He ridiculed the Bloomberg dispatch and came up with some observations that might be good food for thought for people who blindly follow the P/E ratio as a guide for rating stocks - the relations between the stock price and the earning capacity of a company. Most observers do not realize that those P/E ratio's might not work in China.
In the 1990s state-owned companies used the stock markets as a cash machine. They would list one third of their assets, mostly as a subsidiary, and could get capital from the market while the government departments would still be firmly in control of the company, holding the other two third, known as "non-tradable shares". People would buy shares regardless of the quality of the company, since they knew the value of the shares would go up anyway. That was obvious an unhealthy situation.
In 2000 a government study suggested putting the non-tradable shares on the market could be a good remedy for some of the illnesses of the state-owned companies. The discipline of the market would force them to improve. The investors at the stock markets did not like the idea and a massive fall of the exchanges started that lasted for five years. The idea of a market that would triple in size drove those investors out of the market and the stock markets lost their attraction. Even the denials from the government they would list the non-tradable shares caused more plunges because the people did not believe them.
In 2005, with the stock market at its lowest point, the government started to do what was suggested five years earlier: they started to release those government-held shares. But in 2006 the market reacted in an opposite way and started a long journey up. "Basically they did nothing differently in 2005 from 2000, but the market had changed," says Peter Alexander. "There were more institutional investors and mutual funds in stead of the Mr. and Mrs Wang who dominated the market in 2000. This time the investors did not rush out of the market."
State-owned companies are putting now all their assets in the listed vehicles and that is changing their earning capacities dramatically, says Alexander. "Looking at P/E ratio's makes no sense at this stage, since we are looking at fully different companies."
The floor is yours, nay sayers.
PS: Peter Alexander is going to be associated with our Speakers Bureau and if you are interesting in hearing this very engaging speaker, do drop me a note.
1 comment:
Hi Fons, this analysis is not convincing for me. The key issues are that the government can change the rules whenever they want (making the market unpredictable), and that the investors have limited choice in which market to put their money (Chinese can only invest in the domestic market).
Of course P/E ratio's matter, I don't understand from this story why it should not. If a company is listed in both HK and SH, the SH P/E ratio will have to adjust to the HK ratio when the market will eventually open up.
I was not at the event last night, but it seems like a very one-sided talk. I don't know Z-Ben Advisors, but do they not have an interest in saying that people should continue to invest in the SH market?
Let's have lunch or a coffee one of these days, it's an interesting topic.
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