Why Shanghai stock might not be overvalued - the WTO-column

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.

Fons Tuinstra

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.

SFCC meeting on the stock market

The Shanghai Foreign Correspondents Club is organizing on Tuesday a meeting to discuss the current events at the Shanghai stock market with Peter Alexander of Z-Ben Advisors. About the event:

It's always a warning sign when ordinary people stop to gossiping about their neighbours in favour of exchanging stock-tips. For months now housekeepers, pensioners and bus drivers have been pouring in their meagre earnings "frying stocks", but the past few days has seen the Shanghai index go into a free fall. Is the bubble on the verge of bursting or is the market stronger than it appears? Peter Alexander will explain what to make of the current slide in share prices and the impact of the ongoing state share reform scheme.

Just for the record: the Shanghai Index is in positive grounds again today, although only marginally, against my expectations yesterday.
The meetings starts on June 12 at 7 PM at Mesa Manifesto at Julu Lu and you have to RSVP here. Non-members pay 50 Rmb entrance fee.

Panic-selling at the stock exchange

The Shanghai stock exchange has taken another dive south on Tuesday, after it already fell 8 percent on Monday. In the morning of Tuesday it was well below 7 percent at some stages. It show that some panic-selling is taking place and it would be worthwhile to stroll along some of the selling points in the city.
The question is when the money moves back in the market and how much damage investors have suffered by selling. In my estimate at the first point when the drop seems to ease, the market will go up very sharply.

Update: Indeed, the swing upwards came faster than I expected. After reaching a few now lows today, the Shanghai stock market ended more than two percent positive. Expect this trend to continue for the days to come.

Stock investors look for more quality

The Financial Times sees a new trend among the investors at the Shanghai stock market. Smaller and more dangerous investments were swapped for more solid participation in the bigger companies like Sinopec. Also ICBC, the Bank of China and ZTE were doing pretty well as some of the smaller companies hit the maximum drop of ten percent per day.
Today the market was very volatile again, going between +2 percent and -3 percent, ending in the lower regions.

Stock markets recover after second dip

The stock markets turned positive again this afternoon after a contraction that lasted for one and a half day. After a dip of over six percent yesterday, the downward trend of the Shanghai stock market continued this morning hitting a new low of again five percent around ten o'clock but was back over three percent up again at the beginning of the afternoon.
A few months ago the stock markets took another hit of 9 percent, but recovered soon after that.
It does indicate a greater volatility, but for the middle-long term the trend seems to be positive.

China's contraction not likely to have big effect - Bloomberg

Just ahead of the second larger contraction in China this year, Bloomberg explains why the effects might not be as harsh as Mr. Greenspan and the rest of the world might think. They asked a wide range of experts:

They say China's economy shows little correlation with its stock market, and the fact that foreigners are mostly excluded from owning shares -- even Chinese participation is limited to less than 10 percent of the population -- means the effects of a bursting of the bubble would remain contained.

What is the fun of our local financial circus when nobody panics anymore? We might have to switch the subject.
Much attention is focused on the 100 million accounts that have been opened on the Chinese stock markets, but that figure also needs a reality check. Some of the Chinese media report that only 60 million of those are actually active. Because China has two stock markets, one in Shanghai and a smaller in Shenzhen, each investor opens typically two accounts at the same time. That reduces the number of active investors to about 30 million, actually a pretty low number.

How to cool the stock market - Hu Shuli

Hu Shuli

China's financial authorities got already much advise on how to calm down the overheated stock exchange, but when the chief-editor of the financial magazine Caijing speaks, it is time to listen. She sees basically two ways to deal with the "irrational exuberance", as she rephrases a famous says by Alan Greenspan in 1996.

First, people should not longer be punished for keeping their savings at the bank. With an inflation of 3 percent and an interest rate of 2.4 percent people want to use their money.

Secondly, the government should stop their efforts to educate people but really deal with illegal practises.

Statements such as “there are some cases of illegal operation” in the CSRC notice are too mild. Among those who are active in the market, not a few have problems with conflicts of interest. In some institutions connected with security exchanges, almost everyone trades stocks, and these institutions basically fail to function near the close of a stock-trading day. Trading stocks during working hours has become a “normal” phenomenon. Some relatives of employees of institutional investors even boast publicly about how they make money based on insider information.

(h/t China Digital Times)

Real estate or the stock market?

Not surprisingly, our Chinabiz-columnist Sam Crispin, clings to every sign the Shanghai stock market is ready for a crash. Sam makes a living in real estate and for that industry the recent six months have not been the best. While we cannot say that the real estate industry is falling flat - as has been predicted wrongly for years - things are also not going that well either.

Hundreds of thousands Chinese investors - and not only them - have been investing in the stock markets as that market has gone up since last year, despite an occasional dip. In his latest column Sam refers to an article in the South China Morning Post by independent economist Andy Xie, who predicts massive mayhem when the government does not cool the market down now. (Unfortunately, the South China Morning Post is hidden behind an outdated financial firewall, but if you look very well, you might find Xie's column here.)

Now, I'm not going to deny there is a bubble and, yes, a correction will come. But what I find strange is that the Chinese media present Andy Xie's story in a different way than the Hong Kong newspaper. In this summary of an interview Andy Xie gave for Phoenix TV we seen an element that would have messed up the argument for the South China Morning Post a bit: Xie says that despite the expected short-up correction, the Chinese stock markets will move upwards for the foreseeable future.

So, yes big problems, but when you prove to have a strong stomach, you might see it through. The difference in tone says more about the different media than about the real situation. The South China Morning Post still seems to love a decent doomsday scenario for China.

Storm at the A-share market

Billsdue summerizes the frenzy at the A-share market. Every day 200,000 newcomers open new accounts to trade on the market, flooding the market with an estimated average of 6 billion Renminbi

J.P. Morgan gets 90 bn Rmb offered for new fund in one day

A new mutual fund by J.P. Morgan Flemming received in one day time 90 bn Renminbi (US$ 11.6 bn) of subscriptions, Reuters reports, more than ten times its own estimation.

The oversubscription ratio is one of the highest seen at any fund since China's stock market bull run began a year ago, and suggests new Chinese investors are continuing to enter the market, fund managers said.

Originally the fund wanted to raise eight billion Rmb in the market, but has decided to increase the figure to 10 billion Renminbi. The rest of the money will be returned. Dealing with a larger amount of capital would be rather difficult to deal with in the current market situation. Also regulators have installed a cap of 10 billion Rmb.
The success shows not only that there is enough money still available in the market. The reputation of J.P Morgan's China International Fund Management Co. has been very successful with their mutual funds in the past, another reason for its current success.

Investing in a Chinese mutual fund

Last night it happened, yes you hear it right. Last night at midnight we invested slightly over 200,000 rmb in a new mutual fund of the China Merchant Fund.
Why did we pick that one? It was not because of a team that had a reputation of brilliant investments. Actually, friends at the China Merchant Bank said they preferred other funds, like the China International Fund Management (with J.P. Morgan Fleming as a foreign partner) or E Fund Management. The track records of their mutual fund teams are really very good.
The problem: their funds were already running around for a while and followed the upward trend. Buying into an existing fund is really not that attractive now the rates are going up so fast. So, we decided for the China Merchant Fund, whose past performance was also not that bad.
Now, we can sit back and relax, I hope, and we will figure out next some interesting international funds with China connections.
In short, why do I believe in this market? For the time being, there seems only one determining factor for the future of China's stock markets - apart from stupid acts by God of course. The investors have to believe that the government is not going to mess around with the stock markets. At the beginning of this century, the story the government was going to dump US$ 250 billion of non-tradable shares on the market caused a spiral down. Even every announcement this would not happen caused another plunge, since the investors did not believe those announcements.
Now, there seems this basic confidence the government is going to do it right. Listen what I say, it is not whether the government is doing it right or wrong, but what the investors think about the government.
When all goes well, we might in ten years time have a stock market that acts as a stock market and reflect the movements in the economy and the achievements of individual companies.

Update: at least today we made a first profit.

Jumping in the sea, joining the Shanghai stock exchange

After much talking and discussing, even a minor trust crisis, we are going to make the jump into the unruly waters of the Shanghai stock market.

Of course, my first loyalty goes to my investors, who have given my their very conditional trust. After we have made our move, we can you the might of this weblog and you can push the rate up higher. We talk again on this on Monday.

Why the world was (again) wrong on China - the WTO column

(Apartly revamp for Chinabiz of an article I did here before )

The Tuesday dip on the Shanghai stock exchange has brought China yet again in the middle of the world's attention, and yet again for all the wrong reasons.

For some small investors I'm doing some research into the best way to invest a bit of capital, and Tuesday and especially Wednesday and later in the weekthe Shanghai stock market (SSE) showed itself from its best side in trying to confuse the international financial world.
Some people, including those who have asked me to help them in investing some capital, have already publicly declared that they have serious doubts about my mental health. But for the time being, I stick to my guns, and maintain that there has really nothing seriously happened. Doing business in China and especially working on the stock exchange - even if it is through mutual funds - is not for the fainthearted.
First, some fundamentals. China's financial system, including the stock markets are - not yet - part of the international financial system. Its currency cannot be exchanged freely and foreign investors cannot invest at the Chinese stock market, unless they have a Chinese partner - I mean in terms of marriage or joint venture. China's financial exposure is still marginal.
So, when the Chinese stock market went down 9 percent on Tuesday, there was no reason for the international stockmarkets to follow. The international stockmarkets do not drop when the pope in Rome breaks a leg, do they? Or maybe they do but both China or the pope cannot be blamed for that.
Some analysts thought they could get away with they ludricious actions by saying that it might mean that the Chinese economy as a whole would be in danger. Statements of that level only indicate that those people are in need for an early retirement. Do not put them at a guard at the front door. Send them home, now.
Historical insight is of course not an asset that counts in an industry that is reported like a soccer game, but it does make sense to go a few years back. From the beginning of this century the Chinese stockmarkets have been extremely boring from an investors point of view. They only went down. Last year, they went up of course in a rather fast way, but the stockmarkets did not marginally reflect the excitement of the exchanges in Shanghai and to a letter degree in Shenzhen for the investors in the 1990s. Not only behaved the market fully out of line with the international markets, every sense of logic was absent. Nobody knew what was going to happen next, you only knew you needed a strong stomach.
I was not really shocked when the stock market dropped 9 percent on Tuesday. Even for Chinese standards that was stiff, but - hey - the investors in Shanghai had been missing their favorite rollarcoaster movements for over seven years. We will see more, much more of that.
The government has not started a serious crackdown, the fundamentals are still in place for an upward direction in the next six months, although it will not be a straight line, no sir.
So, I will check, which mutual funds and other financial institutions kept a straight spine on Tuesday and did not sell off their Chinese stock. That shows they might have a clue how China works and might be worth mine and perhaps your investment.

Fons Tuinstra

Fons' fund - Tuesday: the watershed for mutual funds

Time to resume my research into the best way to invest a bit of capital, especially now last Tuesday and especially Wednesday the Shanghai stock market (SSE) showed itself from its best side in confusing the international financial world.
Some people, including those who have asked me to help them in investing some capital, have already publicly declared that they have serious doubts about my mental health. But for the time being, I stick to my guns. Doing business in China and especially working on the stock exchange - even if it is through mutual funds - is not for the fainthearted.
First, some fundamentals. China's financial system, including the stock markets are - not yet - part of the international financial system. Its currency cannot be exchanged freely and foreign investors cannot invest at the Chinese stock market, unless they have a Chinese partner - I mean in terms of marriage.
So, when the Chinese stock market went down 9 percent on Tuesday, there was no reason for the international stockmarkets to follow. The international stockmarkets do not drop when the pope in Rome breaks a leg, do they?
Some analysts thought they could get away with they ludricious actions by saying that it might mean that the Chinese economy as a whole would be in danger. Statements of that level only indicate that those people are in need for an early retirement. Do not put them at a guard at the front door. Send them home, now.
Historical insight is of course not an asset that counts in an industry that is reported like a soccer game, but it does make sense to go a few years back. From the beginning of this century the Chinese stockmarkets have been extremely boring from an investors point of view. They only went down. Last year, they went up of course in a rather fast way, but the stockmarkets did not marginally reflect the excitement for the investors in the 1990. Not only behaved the market fully out of line with the international market, every sense of logic was absent. Nobody knew what was going to happen next, you only knew you needed a strong stomach.
I was not really shocked when the stock market dropped 9 percent on Tuesday. Even for Chinese standards that was stiff, but - hey - the investors in Shanghai had been missing their favorite rollarcoaster movements for over seven years. We will see more, much more of that.
The government has not started a serious crackdown, the fundamentals are still in place for an upward direction in the next six months, although it will not be a straight line, no sir.
So, I will check, which funds kept a straight spine on Tuesday and did not sell off their Chinese stock. That show they might have a clue how China works and might be worth mine and perhaps your investment.

Fons' fund - Bubble or no bubble?

While I'm still struggling through my Investing For Dummies, I'm also following the news about the stock markets and mutual funds a bit. What I find really very funny is the way how sometimes analysts outside China try to make sense out of the Shanghai stock market and do as if it is a normal stock exchange. Especially the talk about bubbles is funny.
They include Shanghai in their "Asian" overviews as if the market decides what the shares are doing. Chinese investors do not care about the international market, they mainly look what government is doing. In the 1990s the government created this joyful rollerscater, the government caused to plunge most of this century and cause the upsurge in the past year.
The story is even a bit more complicated. It is not the government who is driving the market, but the anticipation of the investors of what the government will do.
That stock market is becoming more important as the measure of the government to cool down the real estate sector seem to have effect. So, does the government allow the stock markets to swallow the capital that is floating around in China? The China Securities regulatory Commission is trying to slow down its growth, as the investors went crazy because of the recent upsurge.
I believe the Chinese investors will keep on taking the risk for the coming months. Eventually, the government might really slow down the market, but the warnings are not yet strong enough.

Investing For Dummies, 4th Edition

Fons' fund - Studying on future investments

I'm a bit quiet on my announced investment program, but first I have to get a bit smarter. Fortunately, today arrived the promised Investing For Dummies, 4th Edition book, so that process should go a bit faster.
Also, pushing some projects before the country goes on a holiday. We should be able to make some announcements soon.
Met for lunch Rich Brubaker, of AllroadsleadtoChina. He is blogging for four, five months and the first blogger I have identified on walking distance. But there must be more.

Investing For Dummies, 4th Edition

Fons' Fund - China's mutual funds heading for a pause

The Asian Investor suggests today that China's stock exchange regulator, the China Securities Regulatory Commission(CSRC), might be heading for a pause in admitting new mutual funds on the market. One of the ideas was to look at new products appearing on the market.
A few of the succesful mutual funds, for example those of Boshi Fund (now called Bosera Funds) and the China Merchant Bank, have been able to reduce losses when the stock market was heading south and have made huge gains over the past year, as the market went up. Problem is now that they are rather expensive to join, so, looking for new products with companies that have already a good reputation would be an alternative.
Perhaps not at the short term.

Update: China Knowledge has a similar story with a few different details.

Fons' fund - Some basic tools

I decided to have a first round of surfing on my plan to help a few friends to invest their money, like I announced this Friday.
The broken internet cable cost me a lot of time surfing for information. So, I actually picked up a book, a habit I do not display that often, by Jonathan Worrall and Peter O'Shea, From Wall Street to the Great Wall: How to Invest in China.

I only browsed through the book. The information was so generic it did not offer much new information for me. It might be a good starting point for those who actually have no clue about China, but then you have to wonder if you should have a go at China at all.
At the end the book becomes more specific, but then, it is a book so much of the information is rather outdated.
I was also advised to have a look at this Fund selector, but the bloody url is still downloading while I write