China’s stock markets have scaled new heights in recent months and like a worried parent looking to rein in a wayward teenager, regulators are starting to tinker with the rules.
This may be counterproductive. If Beijing is trying to curb wild swings in prices, such as on May 28 when the Shanghai Composite dropped 6.5% in one day from a seven-year high, it should encourage investors to follow the economy and corporate earnings rather than its own bidding.
Investors in China trade on momentum and sentiment driven by government policy. Around 80% of turnover is by retail investors.
So market performance bears little resemblance to fundamentals. For years, China’s stocks languished while the economy boomed – now the opposite is happening.
Foreign investors keen to participate in these fast growing markets via new pathways such as the Shanghai-Hong Kong Stock Connect find valuations daunting. Shanghai is trading at 26 times current earnings, Shenzhen and ChiNext which may soon be opened up to global investors are trading at an even frothier 77 and 170 times respectively.
This exuberance is out of sync with the real economy: China’s economic growth rate has slowed to 7% year-on-year in the first quarter, according to the government, although independent economists believe the true rate is lower.
The government engineered the boom by signalling good times ahead due to restructuring and reform, and by allowing margin financing.
As one trader put it: if you try to trade fundamentals in China you go up against 114 million retail investors registered to trade in Shanghai who are betting on the future impact of Beijing’s policy reforms.
The reputations of China’s stock exchange and securities regulators hang in the balance.
The temptation is to meddle, and some curbs on the explosion in leverage appear sensible. But if China’s stock markets are ever going to bear any relationship with reality rather than policy watching, Beijing has to liberalise more not less. It can speed up the entry of foreign institutional investors, get serious about SOE reform, and make bank lending dependent upon creditworthiness.
About FinanceAsia Magazine
Established in 1996, FinanceAsia is the leading publisher of financial news in the Asia-Pacific region. Our combination of print and online products provide the latest news, analysis and insight into Asia’s financial markets.
Published monthly from our office in Hong Kong, FinanceAsia magazine provides our readers with the latest financial trends, interviews, features and investigative reports. The publication has a readership of key decision-makers at corporations, governments, investment and commercial banks, institutional investors, asset managers, brokers, traders and financial intermediaries.
Our regular sections include:
We look at the key data behind a topical theme in Asian finance, showcased with an array of graphs and tables.
A monthly opinion column from the FinanceAsia editorial team. We provide our thoughts on a topic making the headlines.
Deal of the Month
Our regular two-page spread with its signature artwork and in-depth analysis examines the equity, debt or M&A deal that we feel has had the biggest impact on the Asian capital markets that month.
For company CEOs and CFOs, what investors think is a critical concern, and in this column we help them understand just this. Each month we speak to a Chief Investment Officer of a top fund and outline their views on corporate governance, what stocks they like and where they expect to generate the best returns.
A monthly opinion piece from a respected author or commentator on Asian business, finance or economics.
People on the Move
Here we summarise the key hires, fires and moves at the region’s banks, highlighting at least one major move each month.
We examine the major primary markets deals of the month and comment on the quality of the debt or equity transaction and the secondary market performance.
The Arts of Finance
A light-hearted look at investment opportunities surrounding the arts business in Asia.