What China’s stockmarket reforms mean for investors
By
Harry Stourton Jan 04, 2006
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If you ask anyone why anything has happened in any markets in 2005, the answer is likely to be China. Chinese demand has meant that oil prices have hit high after high. Chinese cash has supported the dollar and the US bond market. Chinese productivity has kept global inflation low. And the blistering pace of Chinese growth has meant that the whole world has grown.
But if China is so great, why is its own stockmarket so absolutely rubbish? The Shanghai market has fallen in every one of the last four years and has lost 9% so far in 2005 alone. It doesn’t make for a very pretty picture.
But it does make sense. The Chinese market is far from transparent – corporate governance is barely existent, and shareholders’ rights are rarely even nodded to. As a result, it might be considered to be unduly risky. Most fund managers prefer to get their exposure to Chinese growth elsewhere – in the commodities markets, or by buying into luxury goods firms such as LVMH (the newly rich love luxury). On the plus side, there have recently been signs that the Chinese government is beginning to understand that if it wants its stockmarket to rise – ever – it will have to force change. It has recently exempted foreign investors from paying capital gains taxes on their holdings in China, for example.
More interesting, however, is the fact that the China Securities Regulatory Commission (CSRC) has begun to sell the government’s equity stakes – which currently make up two-thirds of the capitalisation of the Shanghai A-share market. This supply overhang has long been one of the factors keeping prices down, so its removal could be a major turning point for the market, says David Fuller of Fullermoney.com.
That’s not to say that investors should jump in right away. The market has long priced in the likelihood that the government will be selling shares, but that doesn’t mean that when the supply suddenly arrives prices won’t fall further. Still, “there is a very real chance that China’s A-share index has commenced what is likely to be a very lengthy bottoming out and base building process”, something that makes it worth watching. The next few years will be packed with uncertainty, says CLSA’s Christopher Wood, but in ten years, China might have a credible stockmarket. It may not yet be a beauty, agrees Fuller, but China’s market is at least heading out of the “beast stage”.
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