Stock-market fever has spread so rapidly across China that dozens of taxi
drivers in the city of Chongqing, far down the Yangtze river, have lent out
their coveted cab licences while they spend the day trading shares.
It might be a classic “sell” signal to developed markets, but among Chinese
investors the popular instinct to speculate has defied expert wisdom,
official warnings and mathematical reason.
The mania for shares among Chongqing taxi drivers is likely to rattle western
investors, who remember that the temporary slump in Chinese equities on
February 27 set off a global rout in capital markets at a cost of more than
£1,000 billion.
“Trading hours coincided with my shift so I gave up my cab,” Lin Huaqiang, a
driver, told a local reporter who discovered that more than 100 cabbies had
followed his example.
Uncertain whether to curb the frenzy or to goad it on, the Chinese media have
regaled readers with tales of grandmothers betting the family savings,
pensioners mortgaging their flats and students squandering their meagre
grants on shares.
Even schoolchildren given cash by relatives at this year’s spring festival
have clubbed together to pile into investment funds.
Among them are eight members of a class in a Nanjing primary school. One of
them is Xiao Yue, 9, who boasted that he had already made £66 profit on an
investment of £1,300, concluding: “What fun”.
So far the fun has indeed been child’s play. China’s two principal exchanges,
in Shanghai and Shen-zhen, have multiplied in value as more state-owned
firms sell shares, domestic savers seek higher returns and foreign investors
chase growth and a strengthening currency.
Shanghai’s “A” share index closed this week at 4,218, having quadrupled since
it touched a low of 998 in June 2005. A broader benchmark, the CSI 300
index, has risen 85% since the beginning of this year and trades on 43 times
estimated earnings. By comparison, Hong Kong’s Hang Seng index is up just 5%
and trades at 16 times earnings. ON Friday, partly in response to the
runaway stock-market boom, partly to head off pressure ahead of a series of
top-level meetings between China and America this week, the authorities in
Beijing announced a range of restrictive measures.
Interest rates were raised again, with the benchmark deposit rate lifted 0.27
percentage points to 3.06% and the lending rate raised 0.18 points to 6.57%,
with effect from yesterday. And reserve requirements were raised, taking
them to 11.5%.
Most significantly from an international perspective, the authorities also
widened the band in which China’s currency is allowed to fluctuate against
the dollar on a daily basis from 0.3% to 0.5%. That was seen as a clear sop
to the Americans ahead of this week’s meetings in Washington.
“Low deposit rates have encouraged the flow of funds from savings accounts to
the stock market,” said Mark Williams at Capital Economics. “Today’s
increase pushes the deposit rate to positive territory in real terms. The
direct impact on investors may be minimal, given returns of 51% on the
Shanghai exchange so far this year, but the increases do send a message that
the authorities are concerned about recent equity price rises.”
Julian Callow at Barclays Capital said that actions by the authorities were
clearly aimed at the booming economy and stock market. “We do not expect the
hikes to have strong impacts on China’s growth,” he said. “Their main
impacts may be on the stock market, holding the pace of the rising prices,
rather than leading to a major correction, despite short-term volatility.”
IT is hard to inscribe the expression “irrational exuberance” in traditional
Chinese characters, but the Communist party’s leaders are striving to find
the right words to cool their countrymen’s ardour for shares.
Last week Wen Jiabao, the prime minister, warned that “we will take measures
to strengthen our control of the economy”.
And the head of the central bank, Zhou Xiaochuan, foreshadowed Friday’s
measures by saying that stock prices were inflated. He also pledged to be
vigilant over spiral-ling asset values.
The government did not hesitate to intervene to puncture property prices and
China has now raised interest rates four times since April 27, last year,
and has boosted reserve requirements eight times since last June.
Trimming the differential between deposit and lending rates would help
discourage banks from giving out loans, and thus help to rein in the
“frenzy” in the stock market, said analysts. “I think the government just
wants to send the market a very clear signal that it is committed to
steering the economy towards safe waters,” said Zhu Jianfang, chief
economist at China Securities in Beijing.
Gerard Lyons, head of research at Standard Chartered, said Beijing was anxious
to see sustainable growth. “The authorities are concerned about the booming
stock market and they are concerned to get the trade surplus down,” he said.
“Even though the approach is gradual, they are determined to take the heat
out of the stock market.”
Curbing the animal spirits of millions of Chinese retail investors is a
daunting proposition. Outside the thriving brokerage offices on the streets
of Shanghai small investors said strictures from on high have had little
effect.
“Listen, my dear fellow, the bank lending rate is only 6.12% and I can make
that back and more within a week,” claimed Lin Liang, who has borrowed
700,000 yuan (£46,000) from his bank to trade – secured against his house.
“I like short-term speculation, quick buying and quick selling, capital
gains and more earnings. So far my yield is 10%.”
Another investor, Chen Ping, told how he, too, had raised a loan on his house
for 300,000 yuan and put all the money into the market. “I believe there’s
no risk,” he said.
Like their American counterparts during the dotcom bubble, Chinese day traders
have seized the internet to propagate their enthusiasm among the nation’s
144m web users.
“Will the stock-market index drop? No way. Wen Jiabao [the prime minister]
won’t let it drop. He’s afraid of that. Look at the benefits – stamp-duty
revenues, more money for the government from IPOs, plus the hot stock market
is creating jobs,” wrote Yang Fang, a contrib-utor to the Yahoo China
website.
Hundreds of thousands of individuals are opening brokerage investment accounts
every working day. On May 8, a record 385,121 people did so. In Shanghai
alone, withdrawals from bank savings accounts doubled in April to more than
8 billion yuan. More than 70 billion yuan flowed from bank deposits and
loans into the Shanghai capital markets in the first quarter, according to
official media.
“Although strict regulations apply to the use of private bank loans,
especially when secured against homes, it is quite difficult to control,”
said Chen Wei, of Ever Bright bank, in an interview with Shanghai’s Dong
Fang Morning Post.
There are a few certain winners. From Beijing to provincial cities,
pawnbrokers are reporting a surge in business. Brokerages are reaping a
bonanza in fees. Chao Yin, deputy general manager at Industrial Securities
in Shanghai, told the China Daily that his firm made 40m yuan in the first
quarter.
Meanwhile, pundits and academics are making small fortunes by peddling books,
seminars and vid-eos on investing.
Little wonder, then, that the richest man in Asia, the Hong Kong tycoon Li
Ka-shing, declared last week: “It must be a bubble.”
THE prediction of a decline in prices is widely shared by professionals.
Credit Suisse and Goldman Sachs analysts concurred with Li that a correction
may be imminent. Xie Guozhong, a Shanghai-born economist with Morgan
Stanley, was widely quoted in the Chinese media saying that the bubble could
burst soon, with dire effects.
None of these warnings has yet prompted a sell-off. Many economists believe
the fundamentals are strong enough to sustain a bull market in Chinese
equities that can withstand volatile trading and occasional sharp falls.
Analysts in Shanghai listed five methods the government could employ to cool
the market without killing it. The authorities could increase reserve ratios
for commercial banks once again. They could raise interest rates still
further. They have the option of increasing stamp duty. There has been talk
of a capital-gains tax.
Finally – and most likely – Beijing will bring more state-owned
companies to the domestic market and allow these flotations to mop up
liquidity. Last Thursday, the official Securities Times newspaper disclosed
that plans are afoot to list major companies at present traded only in Hong
Kong.
There is plenty of money available. China has grown at more than 10% a year
for the past four years; it boasts a record trade surplus and shows no signs
of acceding to American pressure to let the yuan appreciate in value.
As a result, China’s foreign currency reserves rose by almost £100 billion
last year, contributing to a wave of liquidity washing through the banking
system and into the stock market.
After years in the doldrums, with memories of boom and bust in the 1990s still
painful, China’s markets recovered their confidence in mid2005.
The government had rescued the state-run banks at a cost of billions of
pounds. It imposed restrictions on share issues while managers devised a
scheme to sell off state-owned companies at a prudent pace. Then it used
classic Communist methods of purge-and-shame to expose the worst cases of
corruption.
Last week there was the first highly publicised example when JP Morgan’s
asset-management joint venture reportedly fired a senior fund manager who
has been placed under investigation for insider trading. Press reports said
the manager faced allegations of misconduct over trades in Xinjiang
Joinworld, a Shanghai-listed aluminium concern. China International Fund
Management, in which JP Morgan holds 49%, was cooperating with the China
Securities Regulatory Commission, they said.
Fund managers appear divided as to whether the case will be taken as a warning
by investors or as psychological reassurance that the markets have been made
more transparent.
While many harbour doubts over the standards of Chinese accounting, most
managers seem to have accepted figures that show profits at companies listed
on Shanghai’s “A” share market grew at more than 80% year-on-year in the
first quarter.
Recent research, too, shows that listed Chinese businesses are building firmer
commercial foundations.
Rupert Hoogewerf, a Briton who publishes statistics on Chinese companies, has
just released a report saying that the value of leading private-sector
brands has increased dramatically. He puts telecoms giant Huawei as No 1,
followed by Ping An Insurance and Wahaha, a drinks firm in eastern China.
Hoogewerf said brand awareness and value were growing. But trust, integrity
and confidence are not yet embedded in the culture of China’s stock markets,
so a correction could do more than psychological damage.
Back in Chongqing, it turned out that the day-trading taxi drivers have turned
their cabs over to country bumpkins. Not surprisingly, complaints are
soaring about cabbies who don’t know the streets, take the long way round,
drive recklessly, overcharge or refuse to turn on the meter. There must be a
Confucian moral in that.
EUROPEAN SHARES SET FOR 20 YEARS OF GROWTH
GOLDMAN SACHS predicts that European stock markets will continue their bull
run for the next two decades.
Even though the European equity market has soared by 150% since the trough of
2003, Goldman points out that it is only now reaching the peak that was
achieved in 2000. This is despite profits rising by almost 60% since 2000
and returns on equity more than doubling.
The bank raised the prospect of sustained economic growth akin to that in the
era after the second world war.
In a note last week on the European equity markets, the bank said that
forward-looking price/earnings ratios have dropped from 22 to 13.5.
It argues that there has been a structural boost in world trade propelled by
globalisation, technological change and the emergence of the so-called Bric
nations – Brazil, Russia, India and China – which will help to keep company
profits and European stock markets forging ahead.
Goldman said that Europe’s equity markets today were mirroring earlier periods
in which the markets had moved almost invariably upwards for up to 25 years.
The strong pound and euro had helped to deliver a new era of growth.
