Sunday, May 27, 2007

The bull in China

How many analysts can really read or claim to know the Chinese stock markets?

Yet we have the so-called ShenXian, none other than Mr. Li Ka Shing, one of the richest Asians and Mr. Alan Greenspan, the former US Federal Reserve Chairman predicting that the rising stock markets in China cannot be sustained. Just like the moon, markets waxes and wanes. However the timing of rises and falls of markets are not as predictable as the moon phases. Ask any savvy trader or analyst.

While the wise Mr. Li and Mr. Greenspan have good intentions when they issued their respective warnings, the bulls in China charged ahead. But the other Asian markets, perhaps slightly more matured, open, and have high equity financing, suffered some jitters on Wednesday and Thursday when these prominent personalities made their respective statements. Damn. Just when the KLSE had rallied on Tuesday, these ‘ShenXian’ poured cold water on the stock markets! Sometimes the prominent like to think that they are wiser than the Chinese Government in enriching its people.

Has the Chinese Government not tried to stop the overheating of the stock markets, just like they did for their overheated real property market? One supposes that all governments in the world would not like to see markets crash which will hurt the economy, both their people and the investors.

The Chinese stock market is an emerging market and restricted to locals and some selected foreign funds. As I understand it, equity financing has been pulled – to prevent overheating - and is no longer made available for the purchase of stocks and shares. This means that investors use cash to purchase their shares. If the money kept in banks as savings or term deposits generate negative growth (where interest income is below the prevailing inflation rate), money will flow into investments that can provide higher returns.

Since most Chinese would be aware that real property prices in their country have gone up sky high or too expensive for them to invest in, their next best investment would be the stock market especially when it is rising. Who does not want to win and to become rich overnight? That probably explains the one million share trading accounts opened with stockbrokers every week for the past few months. Most of the trading accounts with stock broking firms are held by individuals.

According to the Chinadaily, billions of Yuan had been withdrawn every month from savings accounts and term deposits in banks to purchase shares in the stock market. (This by itself is not highly unusual in any other country where there is an ongoing bull run.) “In April, 160 billion out of the total 250 billion Yuan that flooded into the stock market came from individual investors." Yet in the same month, general bank savings rose by 444 billion Yuan although 13.3 billion less as compared to April 2006.

In a country that accounts for almost a quarter of the world’s population and which holds the largest foreign reserves ever (USD 1 trillion plus), a net creditor, and probably has the largest accumulated savings in banks, with a double digit GDP growth during recent years, what is a stock market capitalization of 16.89 trillion Yuan, or a price earnings (PE) ratio of 60?

In a mature market where funds and institutions make up the main players and GDP growth hovers around 3% we would be much concern if the PE’s remain stubbornly high, say, in excess of 30. The professional managers of the funds and institutions who are supposed to be sophiscated and are highly paid to do a good job to bring in favorable returns on investments year in year out would not invest at those rates.

But in China, stock markets can still spring surprises, since all trades are in cash – no equity financing; her economy has expanded faster than the rise in the stock market which took off last year; a high savings rate in the country; the ‘feel good’ factor of rising wealth in assets (real property and shares investment) will spill over to the consumer markets which will further fuel the economy and provide employment. Is this not what all governments and China want?

Of course no Government wants investors to get hurt. With more than one hundred and fifty million of individuals investing in the Chinese stock market, the last ones holding the shares when the music stops (read falls and crash) will certainly feel the pain? But if investors had invested wisely in growth stocks instead of speculative ones (think Information Technology stocks of 2000 in the US where there was no PE since many IT companies had neither business nor profits), their investments may still make money, one day, if the Chinese have the patience and capacity to hold onto them. (Think of stock market crashes, subsequent rebounds and rallies.)

If investors buy shares and real properties with cash as compared to those who rely on borrowings to finance their purchases, they will be alright even if markets turn against them. No jittery banks or financial institutions can pull the carpet from right under their feet when markets plunge.

One way for the Chinese government to protect investors is to properly regulate the markets; another is to educate the people on the pitfalls or high risks of investing in speculative stocks.

Hopefully China can cool down her stock markets like what she is or has been doing for her overheated real property market. And hopefully, the so called ShenXian will stop issuing unnecessary warnings that did not dampened the Chinese stock market but instead affected other stock markets across the world.

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