China’s Stock Market Woes, A Reflection Of Choices Made

Understanding the ways of the Chinese stock markets means facing an organism of unprecedented complexity. The Shenzen and Shanghai move in ways that are not based solely in the economy, at least not in the usual analytic parameters. The arid numbers show that the indexes have recently risen by 20%, after the 70% bellyflop of the last four years, contradicting the theory of convergence – more a habit than a rule – between GDP and stock market index. The Chinese economy has continued to grow, fears of a hard landing have been averted, and exports have picked up again, yet stock market indices continued to fall leading up to the current rebound. Chinese corporate profits, measured in terms of ROI, are low due to the growing manufacturing overcapacity that is hurting margins even in the more dynamic sectors. Another cause is the makeup of the listed companies, where banks and communications companies make up more than 70% of the total, and the former are projecting an uncertain outlook due to the enormous sums lent out to local administrations. The latter have saturated their local market but are unable to reach past the boundaries of their home country. Despite their size and growth prospects, Chinese corporations have lost the confidence of international investors, who have become much more cautious and now consider Chinese companies to be opaque, unreliable, and uncontrollable after the taste they got when Chinese companies were listed in New York. Truth be told, the lack of confidence is not exclusive to foreign investors. Chinese investors have now begun to understand that involvement with the political aspect is necessary for success, and the best deals were made with pumped-up IPOs. Half-baked oversight allowed stock prices to skyrocket only during the IPO phase, open only to a few “chosen” ones, and then to fall inexorably in subsequent months, leaving smaller investors with no choice but to lick their wounds. It is all a game of proven and repeated tendencies that have had the result of discouraging investors. Liquidity is scarce, IPOs languish, P/E is stuck at 9, a low figure considering the growth of the economy. The government has unexpectedly opened the markets to foreign investors, offering them the opportunity to invest up to $80 billion, but the results have been disappointing. Analysts insist that the Chinese market is undervalued with regards to other international markets, but this has not proven to be a draw for investors, either foreign or domestic. And so the Chinese stock market is showing deep flaws, a logical consequence considering the choices that were made not to favour a transparent financial system with supervision for the public interest. The stock market is like a machine that never got off the ground, victim of behaviors that were not always rational. A superstitious nation like China could not forget that the Year of the Serpent – the astrological sign of the recently inaugurated Chinese New Year – brings bad news for the stock market in general. The Serpent has historically brought bearish years, such as the great stock market crash of 1929, and the attacks on Pearl Harbor in 1941 and on the World Trade Center in 2001. Even this notion can be counted among the many reasons for caution, if not total disinterest, this year.