Page 2 of
2 SUN
WUKING China's masses rise up and
buy stocks By Wu
Zhong, China Editor
response to the
further belt-tightening measure. But the Shanghai
Composite Index surged 2.7% to hit 3,841, with
turnover reaching 188.656 billion yuan.
The
Shenzhen Component Index rose 1.66% with a
turnover of 92.636 billion yuan. This Tuesday,
when trading
resumed after the May 1 Labor Day break, the two
indexes continued to climb remarkably. with the Shanghai
Composite Index opening higher at 3937, setting a
new record high.
The
traditional investment wisdom that "what goes up
comes down" in overseas markets is scorned.
Mainland Chinese stock investors and speculators
seem to believe they have markets "with Chinese
characteristics", different from those in Hong
Kong, London or New York.
China's national
anthem was written during the anti-Japanese war
with heroic words like "Arise, ye who refuse to be
slaves! With our very flesh and blood, let us
build our new Great Wall (against the invaders)!
... March on, march on." Now some prankster has
changed some words as: "Arise, ye who refuse to be
poor! With our salary and savings, let's build our
new Great Wall (against the bear). Money comes,
money comes ..." and put it on the Internet, which
has become quite popular among stock speculators.
Indeed, the Shanghai and Shenzhen stock
markets nowadays defy any rational analysis. "It
is hard for us to understand today's markets,"
said Gao Li, vice director of the Research
Institute of Ping An Securities. Gao said the
institute's analyses often go against the moving
trends of the markets. Some analysts tend to use
one word to describe the current Chinese markets:
"madness".
As the yuan remains not fully
convertible, the Chinese stock markets are still
closed to overseas investors. The yuan-denominated
A shares are still largely restricted to mainland
investors. There is the so-called qualified
foreign institutional investor (QFII) scheme that
allows overseas funds to invest in A shares. But
the quota for QFII is capped at $10 billion, which
is very small even compared with the daily trading
of nearly 300 billion yuan, not to mention other
restrictions on QFII investment.
Currently, the capitalization of the two
bourses exceeds 16 trillion yuan, accounting for
about 80% of the country's gross domestic product
(GDP), which was 20.9 trillion yuan in 2006. This
has enabled the mainland to replace Hong Kong as
the world's seventh-largest stock market (the
capitalization of the Hong Kong Stock Exchange is
more than HK$15 trillion or 14.7 trillion yuan).
However, mainland residents still have
huge savings in banks. According to PBoC
statistics, China's household savings deposits
totaled 17.2 trillion yuan, which is far more than
the total capitalization of the Shanghai and
Shenzhen stock exchanges. This does not even
mention funds from institutional investors. While
there is too much money in people's hands, there
are basically no other channels for people to
invest their money, except for the two bourses.
And as I said in the beginning, the Chinese
tend to act collectively. So when the markets
remain bullish, one follows his or her neighbors
or colleagues to put money in. After all, stories
of those who became rich overnight by buying and
selling shares are too tempting to resist. As a
result, more and more people enter the markets,
bringing in fresh funds to push the indices up.
By the end of March, A shares held by
institutional investors were worth 1.72 trillion
yuan in total, accounting for 23.3% of the total
capitalization of the two bourses. This was,
however, 5 percentage points less than in
February, indicating more retail investors had
entered the market in March. This shows another
"Chinese characteristic" of the markets - that
they are dominated by retail investors.
Moreover, the Chinese
investors or speculators believe the outlook of the
markets is good because of the country's
high-speed economic growth. Yes, they would say,
the price/earnings (P/E) ratio at the moment may be too
high compared with overseas markets, but this will
come down when listed companies report strong
growth in profits.
According to a Xinhua
report, of the 1,028 listed companies that have so
far filed quarterly fiscal statements, 941 have
reported average profit increases of more than
100% in the first quarter from a year before. The
average net profits of major steelmakers grew by
216.6% year on year, while companies in the
petrochemical, power and coal sectors also
recorded big jumps. The combined profits of 941
companies listed on the Shanghai and Shenzhen
stock exchanges registered combined net profits of
67.87 billion yuan during the period.
By
the end of March, the average price of A shares in
the Shanghai and Shenzhen stock exchanges was
nearly 40 times their average earnings. But if
their profits double, the ratio would be reduced
to 20. Optimistic about profit growth of listed
companies, some analysts have estimated the
average P/E ratio of the two bourses will drop to
about 28 for the whole of this year and further
down to 22.6 in 2008.
As for individual
shares, the P/E ratio of some shares now is as
high as several thousand. How to justify this?
Speculators say such shares are worth buying
because their companies are expected to be taken
over.
Moreover, there is a general belief
among Chinese investors and speculators alike that
the government will refrain from taking harsh
measures, especially in the run-up to the Beijing
Olympics next year, to burst the bubble, if there
is one. For the government fears a market crash
would lead to social unrest, as now the interests
of nearly 100 million people are involved.
With such sentiments prevailing among
retail investors and speculators, the dominant
force in the Chinese markets, it looks as if the
Shanghai and Shenzhen stock exchanges are likely
to remain bullish for while. But for how long?
Heaven knows.
But one thing is certain:
the law of value will eventually play its role in
a market, whether it is with Chinese
characteristics or not. From this perspective,
some Chinese analysts warily predict that the two
bourses are likely to undergo an adjustment in
the latter half of this year, when the indices may
plunge as much as 30%.
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