SUN WUKONG China share values drain away
By Wu Zhong, China Editor
HONG KONG - While Chinese athletes are harvesting medals at the Beijing
Olympics, China's yuan-denominated A-share market keeps diving to new lows. So
much so that there is now a popular saying among small investors in the country
that "While our athletes are making gold, we are losing silver."
The latest plunge started on August 8, coincident with the start of the Games.
That day (08-08-08) was supposed to be a good day for business as the number
"eight" stands for fortune according to Chinese numerology - yet the Shanghai
A-Share Index tumbled 124.055 points, or 4.3%, and the CSE100 Index of A-shares
listed
in Shanghai or Shenzhen tumbled 4.6%.
On the trading boards of the A-share market, the names and trading prices of
declining stocks are shown in green, those that are flat in blue and gainers in
red. On August 8, as most stocks plunged, the trading boards looked like lawns
in spring. That gave rise to another bitter joke among investors, this time
mocking the boast of the Games organizers that they would stage a "green
Olympics" - already a tough goal given the capital's notorious air pollution. A
shares fell, unhappy punters coined the slogan, "A green market to greet a
green Olympics."
The more-often-cited Shanghai Composite Index (SCI), which covers both
yuan-denominated stock and US dollar-denominated B shares traded in the city's
exchange, also fell about 4% on the day the Games started, and continued to
drop on most days last week, before holding up on Friday with a 0.56%, or
13.53-point, gain. The index shed 155.111 points, or 6%, in the week. On
Monday, August 18 (another "eight"), the SCI decline resumed, with a 130.74
point, or 5.33%, fall to close at 2,319.87.
The SCI by Monday had dropped 62% from its historical high of 6,124 reached on
October 16, 2007, and 56% from its 2007 year-end close of 5,262, making it one
of the worst performing markets in the world this year. Last year, Shanghai
gained 97% even after declines from October to December, making it one of the
top performers in 2007.
The 10-month plunge in prices has brought the value of the A-share market, in
terms of the price/earnings (P/E) ratio, to below that of mid-2005, when the
SCI was around 1,000 points, according to China Securities News. On June 3,
2005, SCI closed at 1,114 - the lowest since 2001 - and the average P/E ratio
of A shares trading on both Shanghai and Shenzhen bourses was 19.96. Their P/E
ratio is now around 19.
The A-share market plunge during the Beijing Olympics can hardly be explained
as a result of rational decisions by in particular retail investors based on
the wisdom of "buying on bad news and selling on good news". It is a result of
them fleeing the market after seeing no sign of the government taking action to
prop up the market as a "celebration" of the opening of the Beijing Olympics.
In mid-July, when the SCI dropped below the 2,800 mark, considered to be a
strong support, senior officials such as Shang Fulin, chairman of the China
Securities Regulatory Commission, and state media such as Xinhua News Agency
and the People's Daily began to talk louder about the importance of
"stabilizing the market". The remarks boosted the hope of small investors that
the government might take measures to prop up the market so that the nation
could greet the Beijing Olympics in a happier mood. There was even talk that
the government would soon set up a stock market stabilization fund to buy
shares directly. At that time, some analysts began to sing optimistically: "SCI
will reach 3,800 on August 8" - again a play on "eights".
They had a recent precedent to support their hopes. In March, when the
declining SCI passed the 3,500 mark, the government did initiate regulatory
measures in the hope of stabilizing the market, including a cut in stamp duty
on stock transactions, restrictions on initial public offerings and
re-financing by listed companies, reining in the sale of shares that were
formerly non-tradable, and speeding up approval of new investment funds. These
measures gave only temporary support.
"The impact on the market of these regulatory measures (perhaps except for the
stamp duty cut) is not direct and immediate," said a stock analyst, named Lin,
with Guangfa Securities in Shenzhen. "So, impatient and desperate investors
simply took them as a good opportunity to sell out. The market had been
expecting more direct moves by the government ahead of the Olympics."
When no such action was announced on August 8, disappointed investors quit the
market.
According to Lin, the confidence of small investors has completely collapsed
and they now prefer cash to stocks. That view seems to be supported by the July
monthly monetary policy report by the People's Bank of China (PBoC), the
central bank. Household savings last month increased 246.5 billion yuan (US$36
billion) month on month, the report said, and are up 255.6 billion yuan from a
year ago when people were rushing to buy stocks to catch the surge in prices.
Zhou Hahua, a businessman and stock investor based in Shenzhen, has just sold
all A shares he held at a loss which he doesn't want to talk about. "The
confidence of us small investors is built on our trust in the government. Now
there is no sign that the government will take action, so what we can do is
leave the market."
According to Lin, the market is still seeking its bottom. "While the P/E ratio
now is as low as 19, if profits of listed companies drop significantly in the
second half of this year, it will go up again."
The outlook for profitability is not bright, given the prospects for the
country's economy, which have prompted recent warnings from the Politburo and
State Council about the dangers of a dramatic decline in the rate of growth.
Echoing this, the latest PBoC monetary report no longer mentioned the term
"tightening monetary policy", which had been adopted since the beginning of
this year. That signals Beijing is now more concerned with an economic downturn
than an overheating economy.
However, some investors and market analysts have blamed the continuing stock
market plunge on a pull-out of international hot money - or money used for
speculative purposes rather than for invetesting in long-term projects.
In early June, Zhang Ming, a researcher with the Institute of World Economics
and Politics under the Chinese Academy of Social Sciences, publicized a study
claiming the amount of international hot money in China totaled US$1.75
trillion, or 4% more than the country's foreign reserves at the end of March.
Zhang argued that at least $800 billion of the total was brought into the
country from 2005 to the end of last year for speculation in the stock and
property markets while also seeking gains on the a strengthening yuan. Zhang's
method of calculation has been disputed by other experts. His figure for the
amount of hot money in the country is much higher than the generally estimated
$200 billion to $500 billion.
Whatever the merits of Zhang's data, his study was then misquoted in a market
rumor last week that said holders of hot money had begun to sell their
800-billion-yuan worth of A shares, serving as a leading cause for the recent
market plunge (no explanation was offered about how the 800 billion yuan was
derived). The rumor first appeared in a market analysis on www.ce.cn, the
website of the Economic Daily, the official newspaper of the State Council or
cabinet, and was quickly carried by other Internet sites.
The rumor was an obvious attempt to make foreign investors or speculators a
scapegoat for the market fall, for several reasons.
Most importantly, individual overseas investors are still barred from the
A-share market. Foreign funds can legally trade in A shares only through the
so-called qualified foreign institutional investor (QFII) scheme. QFII funds
are capped at US$30 billion, or 206.2 billion yuan, far less than the claimed
800 billion yuan. Further, many QFII funds reportedly bought A shares last
week.
Even granting that there really was 800 billion yuan of hot money in the
A-share market coming through various channels including illicit ones, it would
take quite a long time for it to be pulled out, given the average current daily
trading volume of about 60 billion yuan (which certainly cannot entirely be hot
money transactions).
On the other hand, 800 billion yuan is a small figure compared with cash in the
hands of Chinese residents - household savings at the end of July totaled 20.02
trillion yuan, according to the PBoC. Last year, when the market was bullish,
daily trading volume could go up to 300 billion yuan. Had retail investors
remained as confident as they were last year, they could have easily absorbed
stock worth 800 billion yuan.
Furthermore, China still does not allow short selling, creating an obstacle to
hot money holders making money when the market is falling. And why did they not
begin to pull out last October or early this year - are such investors fools or
just far-from-savvy speculators? China also still has in place tough foreign
exchange controls, which makes it difficult for the holders of yuan to convert
their money into hard currency and take it out of the country.
China has heightened its vigilance against financial risks since the financial
meltdown in neighboring Vietnam early this year. This is justified and
necessary. However, to blame international hot money for the market decline
simply rings a false alarm, and demonstrates that after 30 years of opening up,
narrow-minded and unhealthy xenophobic sentiments still exist.
When the A-share market was red hot last year, a prankster rephrased China's
national anthem to sing: "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 ... " (see
China's masses rise up and buy stocks, Asia Times Online, May 9, 2007).
Now where is this "Great Wall"? It has collapsed. But it has not been destroyed
by foreign forces - small investors have simply lost their confidence.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
