(Update Apr 24) The trading tax bullet worked, at least for a day. The Shanghai composite index went up 305 points, or 9.29%. Similar performance from Shenzhen. All but two stocks in the two markets went up, many went up 10% (the limit). See the below picture for more details.
(The thumbnail above is clickable, for faster download, click here for a full size picture)
(Original) The Chinese goverment (regulatories) has listened, and now they are pulling the trigger. Here are the two new policies:
On April 20 Sunday evening, they unveil the new lockup share transaction rules. Basically they are saying any large block of shares (larger than 1% of overall shares) has to go through a special trading platform, to avoid the large supply of unlocked shares. Reasonable move. But I heard people already abused the system. Guess what? They sell 0.99% instead of 1% (Chinese news from Sina). This is one thing I don’t like some of my countrymen: they cut corners and bend the rules. One reason Chinese have not made good quality cars like the Japanese do?
USA today has an interesting article regarding Chinese investors (speculator more precise) learning a tough lesson in the domestic stock market. The article used two example to explain:
(Picture source: USAtoday.com)
In October (2007), Wang, 45, invested $2,800 in a Beijing real estate firm, chosen, Wang explains, “because it’s called an ‘Olympic stock,’ and ought to do well.”
But now Wang’s beginner’s portfolio is down almost $1,000, over three times her previous monthly salary.
Example 2 (quote from the article) again:
Shui Pi, the editor-in-chief of ChinaTimes, predicted this China drop (or crash) in his paper. Here is the link to his article. Quoted some here:
According to Chinatimes.cc (Shui Pi),
Seriously, harmonious or not, I do not think there is a stock market in which more than 50% of the participants making money. To be more realistic, I think 30% make money, 70% lose money is common in stock markets, especially in short term (say one year time frame as shown above).
On the other hand, I do believe investing in 401k (say, buy and hold index funds for 25 years) will mostly likely bear fruits for investors. As one can see this is totally different from the “make fast money” mindset for majority of the stock traders in China, including many mutal fund managers
1. Chinese stock market has started in early 1990s and it has not done well until 2005. Why the China A shares market suddenly became so hot since then?
When the Chinese stock market started in the early 1990s, it’s a way for the state owned companies to raise the capital, and market speculators to make money. It’s not friendly to small shareholders because there are two types of shares in additional to floating shares: the state shares and Fa Ren Gu (legal entity shares); those shares can not be floated. Normally the majority shareholder is the goverment (or some Fa Ren) and they have no incentive to help the stock (floating shares) price go up because their shares can not float.
This all changed in 2005 in the Gu Gai (stock reform): during which the floating shareholder are compensated, and the state owned shares and Fa Ren Shares can be floated within a pre-arranged time frame, just like the share plan of big shareholders in the US stock market (unlock period). Now all the shareholders have aligned their interest. The big shareholder and management have incentive to deliver.
Of course another reason is people got lots of money: Chinese has a more than 40% saving rate; the emerging middle class; people made money in business and investing (housing etc.)
2. How can I buy the China A shares?
At this time the A shares are open to Chinese residents. For foreign investors, they can buy through the QFII (source: ChinaDaily), stands for qualified foreign institutional investors, e.g., Morgan Stanley etc.
3. Why some companies like to buy “shell”?
In China there is this listing requirement that a company needs to be profitable before it can list. Some companies that did not meet this req. but want to list, have decided to buy the shell of already listed companies. That will drive up the stock price of the “shell” company. It often triggered lots of insider trading. Buying “shell” is generally not as good as IPO. Lately the Chinese securities regulatory commission (CSRC, equivalent of SEC in the US) has tightened this “shell buying” activities. This makes economic sense to me.
The policy makers in China found the silver bullet finanlly, the Shanghai composite index dropped 280 points or 6.5% today May 30, as seen from this news from Bloomberg. This is the biggest drop in a day since Feb 27 (9% drop). The policy makers have warned the investors (or more accurately speculators) for a while, the head of central bank said some words during an international meeting (remember the vice chairman of people’s congress, Mr. Chen’s similar words late last year?); two interest rate hikes; three bank reserve rate hikes. But the new investors seemed ignoring all those warnings, as we have seen from the record account openings since March. We have 100 million accounts in China now. Let me quote some words regarding the “bubble” (I was told this was said by Buffet, but have not verified the source):
Normall I don’t comment on the general market trend (I took cue from the Oracle of Omaha because he does not predict this). But China domestic market is just too crazy in my mind. New record for the index everyday. New record for the new accounts being opened everyday. People talk about stocks everywhere. One day I heard a friend recommend a stock, the second day it jumped almost 10%. No, I hadn’t bought that particular stock because I felt I want to follow Buffett rule: buy the stuff I can understand.
Today, Feb 27 Tuesday, the Chinese Stock Market got a huge sell off. You can see some rationale from this Seekingalpha article. This sell off also spread to the US market, not surprisingly some of the Chinese ADRs such as HMIN and MR also dropped 10%. Is it the beginning of a bear market? Or merely a correction? I don’t know. Predicating market trend is very difficult, and it’s not my job. One thing I do know is: investing in solid companies and grow with the company.
I will visit Shanghai in couple days, more first hand analysis of Chinese market will follow.
It seems the “irrational exuberrance” in Chinese domestic stock market finally got a reality check. Here is an excellent article from MarketWatch. Again quoted from the article:
“There was a story on the front page of The Wall Street Journal about a group of little old ladies in the Midwest who soured on their boring portfolio as they watched dot-com investors get rich. The good ladies had traded their utilities for the shares of technology firms.
That’s from Andy Xie, former chief economist for Morgan Stanley (Asia), here is the link. The article is in Chinese. Basically he is saying the high PE ratio of Chinese domestic stocks can not be justified by the growth of economy. The profitability of company and the prosperity of economy are two separate things. Among the factors pushing up the stocks prices, he mentioned the growth of mutual fund industry and the slow housing market.