THE seats are orange plastic, the tiled floor is grubby, the screens flicker
and the clients are an unglamorous lot, wrapped up against a foggy Shanghai
chill that creeps in through the doors.
The branch of Zheshang Securities in Changle Road is a typical engine room of
the world’s greatest stock-market phenomenon.
People such as these – some retired, a few sharp-eyed, wizened speculators, a
handful of cooks and messengers in their working clothes – have opened 140m
trading accounts at Chinese retail brokerages.
Former US Federal Reserve chairman Alan Greenspan, the Hong Kong billionaire
Li Ka-shing and a host of other financial luminaries have all declared that
a bubble exists in Chinese shares. Some of the British businessmen arriving
here with Gordon Brown on the prime minister’s visit to China this week are
of the same view.
Their opinions have not won a wide following on Changle Road. At 9.30 the
Shanghai stock exchange starts its two-hour morning session. The punters
watch the big boards, constantly changing from red (up) to green (down) as
prices move. A sea of red, in China, marks a good day.
They trade by swiping smart cards to access their accounts on shared computer
screens. They pick a stock to buy or sell, then type in the code. Others
think nothing of peering over their shoulders to offer advice. The machine
spits out a paper receipt of the order.
This is, literally, the ground floor of the market. Its customers walk in from
the old French Concession district, where people have watched fortunes won
and lost since the days of gunboats, teas, silks and imperial railway bonds.
Upstairs, Zheshang Securities reserves computers and desks for 100 clients
with more than 1m yuan (£70,400) in their accounts at this branch.
The Chinese markets are starting the year poised between greed and fear after
a stunning performance that brought gains of up to 160%, a correction of 18%
in the last quarter and a punch-drunk end to 2007.
Roughly speaking – there are at least 11 stock indexes to calculate in
Shanghai and the southern metropolis of Shenzhen – at the peak in 2007,
Chinese equities had gone up five times in value since the market touched
its nadir in 2005.
Some investors became fabulously wealthy. Yet many made nothing. The market is
far from transparent. The Chinese state is a far-from-invisible hand. Global
interest rates, currencies, inflation, credit, liquidity and growth will all
affect what comes next.
But in China there is an overwhelming sense that events in the outside world
really do not matter much. Anyone who wants to understand what has happened
here ought to tip the glossy analysts’ reports into the office bin and talk
to people on China’s version of Wall Street.
Widow Wang, perched with her knitting in the fourth row of the plastic seats,
is undaunted. “I’ve been investing for 10 years and I’ve made no money,” she
said with surprising good cheer. So why does she go on doing it? “It’s like
opium smoking,” she said. “You can’t give it up.”
A dour man in his sixties, who said he was a retired official, waved
dismissively. “Look at these people,” he said. “They can’t make money
because they’re stupid. Now take Mr Warren Buffett. He makes money because
other people lose money. But to this lot it’s like a game of mahjong.” He
scrutin-ises the state media and government announcements every day to help
him pick stocks.
Over paper cups of scalding green tea, Zeng Dewei, the young branch manager,
said he thought the bull market was “maybe 80% over with 20% left to run”.
Zeng explains that customers keep coming back because the rate on bank
deposits, 4.14%, is too low. “Chinese people love gambling,” he added.
Faith in brokerages has improved since a series of frauds wrecked public
confidence in the early stages of China’s march to capitalism. By law,
client deposits are now insulated from the brokerage’s own funds.
Investors will have scanned the Shanghai Securities News and its rival dailies
for tips. Every day sees wild trades and suspicious surges in obscure
stocks. But there are more safeguards in place than outsiders might think.
Take small players like Widow Wang. There is no trading on margin available to
her. Most of the millions of retail investors can only trade up to the limit
of their funds on deposit with the brokerage. So their losses in the event
of a crash are capped.
To find out more about the mysteries of this market it is worth taking one
step up the social ladder to the cramped, neon-lit offices of the Shenyin
Wanguo Research Consultancy.
“China is just repeating the story that happened in the 1980s in Japan and
South Korea,” said Robert Li, the senior economist.
Looking out across the 1930s commercial buildings that line the Huangpu River,
it is hard to contest his belief that economic history is at last on China’s
side.
“The big question this year is whether the bull market will come to an end,”
said Li. “We think the earnings of listed companies will increase by 35%.”
Li’s colleague, economist Alan Yuan, said the top 300 listed companies traded
at more than 40 times earnings in 2007 and the rise predicted in corporate
earnings would reduce the price/ earnings ratio to 28 this year. That is
roughly double the p/e of the Hong Kong stock market, but in terms of
historical statistics is nothing near the level reached by Japan’s Nikkei
before the Japanese bubble burst in 1989.
As to why so many small investors lost money, one reason is that the top 300
outperformed others among the 1,400 listed companies and carried more weight
in the indexes.
There is no way for small investors to bet on the index. There are only about
300 mutual funds and most Chinese prefer to pick their own stocks. The
result: rich gains for institutions and mixed luck for individuals.
The two economists say several factors explain the market’s rise. First came a
reform of state enterprises in 2005 that converted state-held shares into
transferable equities. This created incentives for managers to make profits
and aligned their interests with those of shareholders.
Then came a boost to liquidity as foreign speculators poured money into China,
betting, correctly, on a rise in the yuan against the dollar.
This year will bring the introduction of index futures and the coming to
market of 20 billion shares in state enterprises valued at £28 billion. The
regulators will also allow options for senior managers.
The market is insulated from many technical risks. Chinese banks are thought
to be exposed to loans extended for share purchases. But there is
practically no trading in derivatives and exotic products that could
multiply losses on the downside.
“The Chinese market is still a closed market,” said Wang Li Wen, general
manager of Deding Investment & Management, “and there is still a lot to
learn.”
Wang sits near the apex of Shanghai’s financial success in a soaring high-rise
across the river in Pudong, where tall towers proclaim the arrival of the
big beasts from New York and London.
“The Chinese actually like saving money,” said Wang. “For instance, across the
river in Zhe-jiang province the farmers are holding several trillion yuan in
cash in their hands – it’s never even been near a bank deposit.”
The naysayers are hard to find. Columnist Shui Pi warns readers of the
Economic and Trading Daily that China’s blue-chip shares are really “chicken
ribs with no meat”. He said many people who bought shares in Petrochina at
its peak had been left nursing losses. (They do not include Buffett, who
sold his entire holding.)
Analyst Wu Xiang Hong, writing in the Nanfang Urban Daily, dismissed the
widespread perception that the stock market will rise because the yuan is
rising. “A lot of listed companies rely on exports and the yuan’s rise hurts
their cost price. How can this be good news?” he said.
The latest report by HSBC’s analyst Steven Sun shows how the cleverest minds
try to turn all this into orthodox thinking. Sun forecasts the Chinese
markets will end 4% in negative territory after a surge in the first half of
2008 followed by a post-Olym-pics correction. He sees a 20% gain in ‘A’
shares in the first half, estimates the 2008 p/e will be 29 and calls the
launch of index futures “a wild card”. He sees a 7% appreciation of the yuan
against the dollar.
Chinese orthodoxy, as summed up by Xie Baisan, economics professor at
Shanghai’s Fudan University, is more expansive. “Last year Greenspan,
Buffett and Li Ka-shing warned there was a Chinese stock bubble. Facts
proved them wrong,” he said. “Why were they wrong? Because they did not know
China. The markets have been supported by strong economic growth, and I
believe this rapid growth can be maintained for another 70 years.”
That is the message they want to hear on Changle Road.
