Why Hong Kong resists market oversight - Paul Gillis

Paul Gillis

Political protest have dominated most of the media coverage from Hong Kong, but the resistance against a financial and regulatory overhaul has been as important, tells Beida accounting professor Paul Gillis in Quartz. Why an improved market oversight is long overdue.

Quartz:

 “The (Hong Kong) government and the regulators just haven’t kept pace with the responsibility they are charged with,” Paul Gillis, co-director of the IMBA program at Peking University, told Quartz...
Hong Kong’s resistance to tough regulation relates in part to the city’s dependence on a handful of wealthy tycoons, critics say. “It’s the nature of Hong Kong society, which is basically an oligarchy or a plutocracy,” Gillis said. “There are many powerful institutions in Hong Kong that will resist any change they find adverse to them.”...
Without changes, the long-term damage could be severe. “When we had a rash of [Chinese company] frauds in the US, the US-listed China stocks got beat up,” Gillis said. A slew of mainland Chinese stocks that had listed in the US were delisted, suspended or withdrawn in late 2010 and early 2011, after being hit by short sellers and fraud litigation.
“The question is whether the short sellers turn their attention to Hong Kong and find the same problems as they do on the mainland,” Gillis said. “Then, yes, the Hong Kong exchange could lose prestige.”

More in Quartz.

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China´s stock markets: heading for a correction - Paul Gillis

+Paul Gillis 

China´s capital streams have been turning to the stock markets, even when the economy is slowing down. A major correction seems inevitable, tells Beida accounting professor Paul Gillis at VOA. And while China´s stock markets are used to rough times, for the many newcomers it might be a nasty awakening.

VOA:

“A bubble has been formed, and there might be a major correction anytime.  It is a little frightening to see the situation developing because a lot of investors are uneducated people, who might suffer,” said Paul Gillis, co-executive director of the MBA program at Peking University's Guanghua School of Management. 

Unsophisticated retail investors, particularly, are at risk because they often put all of their savings into stock markets, so a market slump leaves them with nothing for retirement, education for their children or other major needs. 

There are several reasons behind the frenzied investments that have drive up stock prices, including low overall interest rates in banks.  Another important reason is the government’s decision to cut interest rates on investment products aimed at wealthier people, Gillis said. Falling property prices have also led many people to divert their savings to stocks, which has never been the mainstay for Chinese investors.  There has been a rise in the number of active stock accounts in China, which grew to 111 million, up from around 95 million a year ago.

More at the Voice Of America.

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Is the Hong Kong-Shanghai Connect a ghost train? - Sara Hsu

Sara Hsu

While it is too early to judge on the success or failure of the Hong Kong-Shanghai Connect between both stock exchanges, financial analyst Sara Hsu says the first signs are not living up to the initial hype, in The Diplomat. It is an important first step, she writes.

Sara Hsu:

Although the Connect program may not have been as wildly successful as had been anticipated, it is an important step in opening up the capital account and will likely experience more traffic as China’s stock market deepens and as Chinese investors become savvier. 

China’s stock market, though increasingly efficient, does not represent a sufficiently diverse range of companies, particularly in Shanghai. 

Approval of stock listings is tightly controlled, and small and medium enterprises, while listed in Shenzhen, are not well represented on the Shanghai exchange, which contains many state-owned enterprises. State-owned enterprises, while undergoing reforms, continue to be over-indebted and have faced declining profitability in recent years. According to HSBC, SOE’s average debt to asset ratio is 65 percent, above the generally acceptable range of 40-60 percent. 

As the stock market faces reforms, and as more profitable opportunities arise, it is only logical that the Connect program, particularly northbound activity, will experience a rise in popularity. Southbound activity will increase as mainland Chinese investors seek diversification, and also as mainland stock prices rise closer to levels seen on the Hong Kong exchange. Right now, Hong Kong stocks are not necessarily viewed as a good value. Mainland investors are highly restricted in international financial investment and have little experience in this area. 

So, sizzle or fizzle? It’s too early to say. Perhaps a slow burn as China’s financial economy deepens. If the financial reforms promised in the Third Plenum meeting last year are truly implemented, Connect may prove a valuable resource for Chinese, Hong Kong, and international investors alike.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

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Hong Kong-Shanghai connect: a game changer - Wei Gu

+Wei Gu 

With less than a week notice, a connection between Hong Kong and Shanghai stock exchanges will give international investors access to Chinese shares. A game-changer, says Mark Austen of the Asia Securities Industry & Financial Markets Association in a talk with WSJ wealth editor Wei Gu.

Wei Gu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

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China's rich prefer homes over stocks - Shaun Rein

Poor accounting standards in China make Chinese investors very weary of stocks in any Chinese company, business analyst Shaun Rein discovered in his research. In CNBC he explains why they prefer real estate, even though the government tries to cool down the industry.

As we sat in his enormous living room, Zhou continued to tell me why he preferred to buy homes rather than put money into the stock market, "There are no annual property taxes, so I just buy homes and leave them empty to resell at some point. At the end of the day, if things go wrong, you still have tangible assets if you buy property." Many Chinese investors hold similar views: they deem real estate as the safest investment in a country ravaged by accounting fraud. After all, even famed investors like billionaire John Paulson lost USD 340 million according to Fortune Magazineinvesting in companies hit by accounting scandals like Sino-Forest. Zhou`s investment strategies indicate the Chinese real estate sector is being driven as much by a belief in the sector as a fear of other sectors. Zhou explained why he shies from stocks, "Chinese stocks are political plays as much as business ones. State-owned oil giants Petrochina or Sinopec might do poorly because the government forces them to cap prices. Or Baidu,  Netease or Sina might get hit by Internet regulation campaigns. You need to analyze political winds as well as business ones.  It is simpler to buy homes.

More in CNBC Shaun Rein is a speaker in the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Not _all_ listed Chinese companies are bad - Shaun Rein

Shaun Rein

Long term China bull Shaun Rein warns against buying into listed Chinese companies, since in many cases they offer a receipt for trouble, he argues in CNBC. Not all NASDAQ listed Chinese companies are bad, but investors have to be very cautious.

Almost all suspended NASDAQ stocks belong to Chinese firms, Rein notes, and he sets some ground rules:

Another rule to follow is to be wary of firms that list in the US first because they did not qualify to go public on the mainland. Internet and social media companies Ren Ren[RENN 12.60   -0.56  (-4.26%)   ], Youku [YOKU  44.49   -4.05  (-8.34%)   ] and Dang Dang[DANG  19.95   -1.01  (-4.82%)   ] recently listed on the New York Stock Exchange, but would not have been allowed to list on the mainland because they don’t have enough profits. Companies need three years of profits before they can go public on the mainland China exchanges. In the US, you do not need to show profits in order to go public. Most senior executives have told me they would rather list in China if they could because they expect the yuan to appreciate.

Also be careful of boutique banks, investor relation firms and accounting companies, called middlemen firms, which are responsible for taking companies public and for pumping up stock prices.

More in CNBC.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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Stock market passed 5000 mark

The Shanghai stock market not only stayed today firmly in the red (that is positive here in China, where some things do go differently), but the index even passed the 5,000 point mark, another record.
Some observers, like Billsdue, expect that the investors will take now a break from their hard work and will a little psychological dip. One way or the other, if there is a dip, it will only be a short one, since the fundamentals have not changed.

stock blogger faces jail

According to the Financial Times the weblog of Wang Xiujie (35) was more popular than that of Jinglei. One his weblog "Big Brother Leader 777" he gave advice on how to invest on the stock market and he also had a popular sms-service. He now has a problem:

Wang Xiujie, 35, was arrested in the north-eastern city of Changchun after an investigation into his unauthorised investment consulting business, Xinhua news agency reported. No charges have yet been filed.

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.

Increased stamp duty causes second contraction

A sudden increase of the stamp duty of trade at China's stock exchange of 0.1 to 0.3 percent has cause a second contraction this year at the bourses, as the Shanghai stock exchange fell more than 6 percent by noon.
The increased tax on securities transactions is largely symbolic, but did not miss its effect. The tax used to be 0.6 percent but was lowered in the past as the stock markets were in the doldrums.

Greenspan does not impress Chinese markets

Chinese shares in the US took a dive yesterday after former Federal Reserve Chairman Alan Greenspan predicted a "dramatic contradiction", but the stock markets in China - as expected - ignored this trend at the opening of the trading.

Mr. Greenspan spoke by satellite to a conference in Madrid, wrote Bloomberg yesterday.

China Petroleum & Chemical Corp., Asia's largest refiner, led a decline in energy companies on the New York Stock Exchange. Shares of China Life Insurance Co., the country's largest insurer, also retreated.
Speaking to a conference in Madrid by satellite, Greenspan said the rally in Chinese shares ``is clearly unsustainable.'' He joins Li Ka-shing, Asia's richest man, in voicing concern about the stock market in China, where the benchmark CSI 300 Index rose to a record today.

Shanghai agency caught in the stock market

A prominent Shanghai government departments has been using its capital to invest in three listed company, against explicit bans to do so, the Financial Times writes. The Shanghai Municipal Housing Maintenance Fund Management has been one of the top-10 shareholder in a variety of companies at the Shenzhen stock market. The agency is in charge of maintaining public spaces and get a levy of two percent on each purchase of apartments.

Fraser Howie, an expert on the Chinese stock market, said it was probable that other government units – including state-owned companies, local government, the police and the army – had been investing surplus funds in the stock market and their holdings could be as high as $125bn.

It reflects the worries by Hu Shuli, chief-editor of the financial magazine Caijing, who blamed the government for not doing enough to stop illegal activities at the stock markets.

"Government will not meddle with stock market" - Fan Gang

Fan Gang

The government will not meddle in the stock market, according to Fan Gang, a famous economist and member of the policy committee of the central bank, according to AFP. Rumors about the bank's involvement appeared on Friday as a set of measures were taken to cool down the sizzling economy.
According to Fan Gang the measure were not targeting the stock market at all, and were also ignored by the investors on Monday.

"The government will not issue policies to support the market or intervene in the market... The market must bear its risks on it own," Fan was quoted as saying. "The market is becoming mature and so is the government."

Fan Gang is also part of our China Speakers Bureau. When you are interested in having him as a speaker, do drop me a line.

Propaganda: stock market falls

Chinese media are sometimes a pretty funny bunch. They would rather tell what they think the government would like to hear than tell their audience the truth. I just saw a headline in the Shanghai Daily, telling the stock markets went down today.
It is eleven in the morning, so too early to cheer, but when I looked it up the Shanghai stock market was just a bit positive and climbed up from a -3 percent during the opening of the exchange.
So, as I already assumed yesterday, not many big things will be happening. Compared to for example Hong Kong the number of Chinese investors is still pretty low, despite the high growth rates. Still enough room to go up.

Stock market bubble is (not) going to burst - the WTO-column

Not for the first time stock analysts have to proof they know what they are talking about when they address the booming Chinese stock markets. Watching those analysts is costing quite some time and energy and you have to wonder whether they add much value. I have been expressing my amazement about their teachings more than once.

The Chinese authorities have been issuing last week more stern warnings to the investors, telling them that what goes up, might also come down. On top of that on Friday they have been announcing some macro-economic measure, like raising lending and deposit rates and widening the trading band of the Renminbi. The analysts were is disarray.Some predicted that market will crash on Monday. Others said there was no reason to expect a crash, at most a correction. I think it is not enough to really make a serious impact.

Fortunately, we noted also the comments of Hu Shuli, the chief-editor of the famous financial magazine Caijing. Hu's comments make sense for two reasons. First, she has an intimate knowledge of China's financial industry, something we cannot blame many foreign analysts for. Second, Hu is rather close to the policy makers and what she suggests might already be part of a growing internal consensus, or is at least part of the internal debate.

First, she pleads for a drastic change of the interest for deposits. Now inflation is three percent per year and deposit rates are at 2.4 percent, effectively punishing those who keep their money at the bank. No way people are going to keep their money in the banks when it is melting away. Hu says, correctly, that increasing the interest rates is especially important for the people with a small budget. They might not dare to stay in the stock market when a correction occurs, while the richer investors might just decide to sit it out. Now, Chinese citizens see a bank deposit hardly as an alternative. It might need a rather drastic increase of the interest rates to cause a reaction.

A second point Hu Shuli is making might be even more important. The financial authorities at the China Securities Regulatory Commission (CSRC) have been relying too much on educating the investors and have not done enough to curb illegal activities, Hu says:

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.

Those both measures, when done in a rather rigid way, could cool down the current crazy without triggering off a major crash. That would be in the interest of all involved, apart from those playing illegal games at the markets.

Fons Tuinstra