Maybe I am among the minority who didn’t notice the recent bull market trends in Chinese stock market. I heard some news, but never really look at what is happening in the market. Maybe people outside Chinese also didn’t pay attention to the performance. Here is what happened.
3 Times Increase
The Shanghai Stock Exchange Index was 998.23 in June 2005. Yesterday, it reached 2870.42, which is the highest in the history of the stock market, and almost three times than one and half year ago.
What a crazy stock market!
Individual Stocks are Even More Crazy
The 3 time increase are only the overall increase. Individual stocks – those good performers are even better. Stories like people get 50% gain in days are not rare. When I watch the financial news, I can smell money in air. Double! Double! is the theme of change, instead of the conservative 6% – 7% expectation.
Buy stock in China is always like buy lottery. If you bought the right stock, it can easily bring your wealth to the sky in days, and if you are not lucky enough and get the bad stock, it will shrink at the same speed. I don’t have experience in the Chinese stock market – I never bought any or sell any in my life. I don’t know what my friends felt when he saw his wealth just increased 30% last week.
Unlike NASDAQ, the stock price in China has a threshold. If it raise or drop too much, it will stop trading and hold until the next day. When I chatted with my friend who know stock, he said, you have to catch the first 10 minutes between 9:30 – 9:40 AM. 9:30 is the market opening time. You start to trade at 9:30. However, if you do not act quick enough, the stock you buy may either stop for raising too much, or dropping too much, so you don’t have a chance to either buy or sell.
I cannot confirm whether this is true. But based on the recent crazy articles I read, it seems cash is flying in air. Instinct tells me it is the right time for the market to crash.
Disclaimer: I know nothing about stock market, so this article didn’t provide any suggestion.
thanks Jian Shuo for your informative post. could a huge artificial bubble be forming in the stock market there which may collapse overnight?
most people I know who have ventured into the stock markets have become like addicted gamblers. when they get ahead, they never quit but keep going expecting to make even more money. eventually they lose it all and then regret that they didn’t quit when they should have. yes, it’s an addiction.
I would say there is an irrational exuberance in the Shanghai Stock Market right now. This has happened in the United States as recently as 7 years ago, when NASDAQ composite hit a high of 5,132.52 on March 10, 2000. Then, the bubble popped. NASDAQ hit a low of 1,108.49 on October 10, 2002. (Source: Wikipedia.org) NASDAQ has recovered quite a bit since. The composite is at 2455 today.
But most people have a really short memory span, don’t they? I’ve been trading stocks since I was 19, that was nine years ago. I studied macro and microeconomics. I have seen the market on the way up, and on the way down. The people who buy stocks today are going to be in a world of hurt when the house of cards crashes down.
There are several reasons why the Shanghai Stock Market is irrational today.
First, people are buying stocks expecting to make easy money, not to be a part owner of the company (a lot of people do not understand that). A value investor understands that he should invest in a company for the long term. Buying and selling stocks by the minute is nothing more than legalized gambling.
Second, there is a savings glut in China. People have a lot of money in their bank accounts from decades of saving money. The savings rate of the average Chinese citizen is north of 40%, while the average American saves nothing (and sometimes negative).
Third, there are few alternative investment choices. The average Chinese citizen cannot invest in foreign capital markets. Most people have the choice between a savings account (which pays 2% interest) or the domestic stock market (pays a lot more than 2%).
Finally, everyone in the world knows that the Chinese RMB is going to appreciate in value. Billions of dollars of foreign currency has been pouring into the Chinese economy. There is so much foreign money that the Chinese Central Bank has to buy close to one billion dollars every day to tame inflation. A lot that money goes into the stock market (or the housing market, another bubble).
“History has not dealt kindly with the aftermath of protracted periods of low risk premiums.” — Alan Greenspan
Stock market return rates of 300% per year is unsustainable. Economists have a saying “Anything that can’t go on forever won’t go on forever.” The long term trend of any stock market is the GDP growth rate plus inflation rate.
Example
On average, if an economy grows 10% with an inflation rate of 3% in a year, the stock market should grow at 13% that year.
Of course that’s talking about on average. Like what they say “What goes up must come down”.
“When irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…” — Alan Greenspan
Though critical of this blogger from time to time, let me share some facts here:
The global stock market capitalization is around 25 trillion US dollars with US markets accounting for more than 50% or at least 12 trillion. The Chinese market value last week just exceeded 1 trillion according to bloomberg. Considering the size and potential of Chinese economy, the Chinese market is still quite under-capitalized. While the short-term outlook does seem frothy and begs correction, the trend looks much higher from here. Any crash (which I doubt will happen) or significant correction (which is quite possible) is a once-a-lifetime opportunity.
Compared to Russia and South American counterparts, Chinese market is much less ‘crazy’.
Speaking of “smell money in air”, how about the following statistics for 2006 as “The Best of Times”:
Peru was the biggest winner this year (2006).
The Shanghai Composite index ended 2006 with a gain of 130%. Hong Kong’s Hang Seng index jumped 34%. Nearby, Taiwan’s major index increased 19.5%. Stocks in Singapore surged 27.2%, Vietnam 144.5%, Indonesia 55.3%, Malaysia 21.8%, Philippines 42.3% and Sri Lanka 41.6%. The Japanese Nikkei’s 6.9% rise increased 2-year gains to 51.4%. Less impressive, the South Korean Kospi Index gained 4%, while Thailand’s SET index declined 5.9%.
Fueled by enormous global financial flows coupled with runaway domestic Credit growth, India’s Sensex Index surged 46.7%. The global inflationary backdrop supported the Aussie and Kiwi economies and markets. Australia’s major equities index jumped 19.0% and New Zealand’s 20.3%.
Robust Credit and liquidity expansion throughout 2006 supported strong asset inflation throughout Europe. As for stocks, UK’s FTSE 100 rose 10.4%, France’s CAC 40 17.5%, Germany’s DAX 22.0%, Spain’s IBEX 31.8%, Italy’s MIB 16.0%, the Swiss Market Index 15.9%, Netherlands’ Amsterdam Exchange’s 13.4%, and Sweden’s Stockholm 30 19.5%.
The more “periphery” European markets posted even greater gains. The major equities index in Ireland rose 27.8%, Portugal 33.3%, Belgium 23.7%, Denmark 12.2%, Finland 17.9%, Norway 33.6%, Austria 21.7%, and Luxembourg 33.0%. Despite a weakened currency, much higher interest rates and a lot of nervousness, Iceland’s ICEX gained 15.8%. Stocks in Poland gained 41.6%, Czech Republic 7.9%, Hungary 19.7% and Bulgaria 48.3%. Russia’s RTS Index surged 70.8%, increasing 2-year gains to 221%. Stocks in Ukraine gained 41.3%, Croatia 60.7%, Slovenia 37.9%, and Estonia 28.9%. Greece equities rose 19.9%, while the Turkish stock market declined 1.7%.
Other spectacular periphery market gains included Morocco 56.7%, Namibia 46.7%, Botswana 74.2%, Nigeria 38.7%, and Kenya 42.1%. Meanwhile, stock markets throughout the Middle East suffered from bursting Bubbles. The Kuwait market dropped 9.2%, Saudi Arabia 52.5%, Jordan 32.6%, Qatar 35.5%, and the United Arab Emirates 43.3%.
Yields in Mexico, Brazil and throughout much of Latin America dropped to record lows. Equity markets rocketed ahead. For the year, the Mexican Bolsa surged 48.6%, the Brazilian Bovespa 32.9%, the Argentine Merval 35.5% and Chile’s Select Index 37.1%. Venezuela’s major equities index surged 156%, Peru 168%, Costa Rica 77%, Bermuda 25%, and Colombia 17.3%.
jian shuo, while i wouldn’t recommend investing in the shanghai/shenzhen stock markets you should look into investing in the stock market for your retirement future as stocks have proven over time to have the best long term investment returns.
just a question, is it possible for mainland Chinese to invest in the Hong Kong stock exchange as well as foreign exchanges like Nasdaq and the NYSE?
dezza,
For a long time, mainland Chinese are not allowed to directly invest HK stock exchange, Nasdaq, NYSE or any other foreign exchanges. On the other side, foreigners are not allowed directly invest Shanghai/Shenzhen A-share stock also (Oh, there’s B-share for them:)
Recent years, Government seems is willing to allow more capital movements. It launched the Qualified Foreigners Institutional Investor (QFII) scheme for foreigners, and the Qualified Demotics Institutional Investor (QDII) scheme for demotics. Foreigners can invest A-share stock through QFIIs, meanwhile, demotics can invest stocks outside China through QDIIs.
Of cause, there is no ‘free’ movement currently, there are still ‘quotas’ for QFIIs or QDIIs. That’s the approach Government how to open the door between demotic and foreign markets. The changing is slow, while I’d like to think this door will eventually be removed, like other doors…
‘demotic’ should be ‘domestic’. poor spelling error…
Anyone, please tell a foreigner living here : How many real estates can a foreigner possess in mainland China ? I heard so many rumours of this…
God knows! The policy can change as fast as the prices of the stocks, different real estate agent can come to me with different interpretations.
Hey carsten, “life was like a box of chocolates, you never know what you’re gonna get”………..Forrest Gump
carsten, the Chinese law governing the foreign ownership of the real estate more or less contains the principal only, so different bureaucrats can have different interpretations and implementations.
im visiting shanghai for the first time from tomorrow. is the south china morning post newspaper available at newstands? otherwise what should i be reading? thanks
I just wonder if Western investors will be chilled somewhat to continue to invest heavily there after China fired that killer satellite missile on January 11.
thanks for the detailed explanation gengmao.
however, until the busines situation improves and becomes more open and transparent, I doubt many foreigners will be rushing into China to invest stocks listed in the stock markets there..
Mimi: Hong Kong’s SCMP is only available in finer hotels in mainland China. It won’t be on regular Chinese newsstands..
The Chinese stock market does look irrational to me. Will it crash? I think any market that experiencing this kind of irrational exuberance is bound to have major correction, be it in the US or in China. But what worries me about the China market is that eventually when the bubbles burst, it’s the average small investors who will suffer the most. Many of these folks have little knowledge of what they are buying into. And as dessa upstairs said it the Chinese companies still lack the much-needed and regulated transparency. Average small investors simply have no tools to judge the quality and financial strength of the companies they have bought their shares. It’s scary!
The major reasons for the escalating Chinese stock markets are many folds. I’m not a pro, but I ived in Shanghai for 4 years, and my observations may have some validity.
1) Lack of investment channels: The interest rates paid by banks for savings is pitiful. I believe I was getting 1.7% for a 3-month term deposit. Yet, I’m getting 4.7% for money market fund, which I can liquidate any amount of money within one business day. So anything with substantial higher yield attact people to flock into.
2) The housing market has suffered prolonged setbacks due to a series of new govermental tax laws implimentated since March of 2006. Shanghai’s real estate market appreciated so much so quickly between 2001-pre-Feb.2006 that many foreign buyers bought properties there. In addition, major foreign real estage funds also bought a number of highend commercial properties. That all said, people shift their money to the stock market from the real estate market.
3) The expectation of Yuan appreciation also propelled much “hot money” pouring into China. Well, Yuan has appreciated a good 6% since China abandoned pegging its currency to the USD. There are all kinds of rumors about how much more Yuan will appreciate. Time will tell.
4) Sheer herd mentality. Word of month quickly spreads news both good and bad.
Personally, I wouldn’t want to invest in the Chinese stock market, but I may shelter some money into an US mutual fund that invest in Chinese companies.
How can I as a foreigner buy stocks, heard there is a Shanghai A and B stocks.
Which one is for the foreigners? Is it a good size of capitalisation on those stocks?
Pls advice, thanks,
teddy
It seems Shanghai B is for USD investment for foreigners. I don’t know details though.
i invest rmb58000 to fund. it is a good investment, i think. The market is good, it is good for every body. investers con make profit, goverment can take tax. The dealers can make mony. Everybody is happy. THE bull market is good for both government and people. So why not make the market bull? The government is doing so. On the other hand, some rich people have a lot of Us Dollar. If The dollar is weak compared with RMB? where should the dollar go? A good idea is to invest stock or fund. They will not go to real estate. if so many many go to buy house, it will be very expensive. and some official will take mony under the table. so , chinese stock market is NOT crazy. it is going the right way. no bubble. it is healthy market. my idea is to buy some Fund. such as deshengyoushi ,etc. the government will support the market. it will not collapse as several years before. thye bull market will sustain for at least 1 year. it will good in 2007. if you buy Fund, the money in return will be about 110% at least.
Hi,
I’m a foreigner, leaving in Shanghai and who invested on Shanghai Market.
On a mid-long term perspective, Chinese companies will undoubtedly continue to grow. First because the Chinese economy is growing 10% a year. Secondly, because those Chinese companies are also gaining market shares all over the world. So, I really don’t think there is a risk to invest in China if you have a 3 to 5 years perspective.
On the short-term though, the maket is overheated. As Twang pointed out, there are very few investment opportunities for Chineses. The real estate market captured most of the investment in the last 5 years, but the recent regulations imposed by the central government to cool down real-estate have been quite effective, limiting growth to 20% in some cities or even a decline (-2%) in Shanghai. Therefore, all this money is now invested in the stock exchange, specially since the end of 2006 (+30% in 2months since december 1st). People are really buying like they buy the lottery, without much financial knowledge. The more they win, the more they buy, pushing the stocks even higher.
There will definitely be a moment when the market will correct itself. But I don’t think it will explode like the New-economy bubble, because, as I said, the growth of Chinese companies is real and solid. It will gradually slow-down or decline a bit in the coming months, but nothing much more. The government still has a very strong hold on the economy and won’t allow things go out of range.
One other factor, specific to the Shanghai and Shenzhen market, is that it is controlled by a handfull of large funds who don’t play the market that fairly. I read a report from 2004 explaining the extreme intra-day volatility of the market by the fact that some funds made some operations between each other at the beginning of the day to set the trend for small share holders, and then buy-back or sell a few hours later. Although the market has become much more transparent since 2004, I still think it’s very risky to be an individual share holders. So if you go for one of those large chinese fund, you limit your risk.
My advice is to wait a few weeks before buying, and go with a large fund.
Dear all:
I am spanish girl and I was in September in Shanghai and my friend Amalia and I met three boys (students) at one hotel I can not remember the name.
One of them was from Belgium and was studying chinese medicine for a couple of months (her mam was chinese); I just remember the name of his friends: David (UK) and David (Finland?)
If someone knows how to contact him (the belgium doctor) or if you read this, please contact me.
Best, EVA
EVA, I know the chance for your friends to notice this comment is really low. However, I’d like to wish you find your friends soon.
Thanks everybody, I’ve learned a lot from reading your comments. Things definitely appear differently depending your point of view. As an investors, you surely wanna make as much money as possible out of the investments. Like you said, both government and investors are better off if the market continues to skyrocket like it is doing right now. However, I think you, as a short-term investor, should pay very close attention to the market so you don’t lose too much (well, this is why market crashes. Everybody just withdraws). I think that Chinese government will soon intervene and clam the market down. They want a healthy market. The inflow of foreign money will fasten the pace of chinese dollar appreciation….
Thanks for your thoughts on the Chinese stock market. I am just getting into it now. Thinking of buying into some B-shares… I agree with a lot of what you are saying – the Chinese economy is going to keep growing for quite some time I think. Share values are increasing steadily. Maybe there will be a dip, but I think in the long term, growth is the key word.
A few questions for you all:
1. When do you think the Chinese will actually merge the A-share and B-share market? There is some speculation about this happening, but are we talking in months, years or what?
2. I go onto the major websites (Bloomberg, Reuters etc etc) for share quotations, but none of them have mainland China stock market quotes – why is this? I use the Chinese stock market websites, but wondered about this..
3. What kind of predictions would you make for the Chinese B-share market in 2007?
Cheers,
Simon
Dear simon,
1.The merge of A share and B share will be years at least.
2. The quotations is on share newspaper. The up and downs of if is always depend on rumors. It is not on news paper. For example. Someone has connection with some listed company, he maybe told this secret information to you, if you are lucky. Then you can make decisions weather to buy or to sell a certain kind of share, may be he could tell you the highest price. Several days before, the stock market collaped, somebody sold everything out before the falling, most people suffered considerable lost. “Information” is the keyword for stock.
3. No body could make predictions. Several years before a person from Wall street came to Shanghai to invest in Stock , but he lost, before he leave, he said , the more you learn, the more you lost, the knowledge he he learned in wall street is useless, he has no connections to the people close to the institutions, it is impossible for him to win.
In china stock is like gambling.
A very informative article. I didn’t know that the behavior of Chinese markets were so different from the New York markets.
I am am rounding up on a novel I have been writing for the past two years. It is actually a biography of the life os a struggling ESL teacher from Africa and according to the people hwo’ve test-read this work, they think it will make a fine read with people from all over the world because of the cultural diversity of its charaters and the vivid x-ray of certain aspects of chinese culture.
My question is, I need advise on how to go about publishing it since i have never done this kind of thing before.
Thanks
“In china stock is like gambling.”
That’s the most honest thing I heard this week. Hence, if you’re not an intelligent insider and/or “Mad Money” trader on the latest “bubble-du-jour”, better not play at all.
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In our real estate listing, we offer a great variety of land properties of all kind all over Costa Rica, from nice city houses, including condos, lots, country houses and farms, to splendorous luxury properties with extraordinary ocean views or located in front of the most beautiful beaches of Costa Rica.
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I think Chinese stock market will increse day by day due to Chinese people have few invest ways today.
I just swimming in stock water now in China, your comments are very useful!
Thanks!
I think the China Stock Market will collapse very soon.
To invest in the Korean stock market, you need to buy EWY stock. EWY is the stock symbol aka:, iShares MSCI South Korea Index which invests in Samsung stock as well 10 other holdings. (see list below). The stock was purchased through my US broker at H&R Block. The overall S&P ranking is 3 stars, “high”. Below are some addt’l highlights about the stock. Overall the stock has done well since purchasing it in Jan 2007.
Top 10 Holdings (6/30/07) (%)
Samsung Electronics, Ltd. 14.69
POSCO 7.83
Kookmin Bank 6.49
Shinhan Financial Grp 4.19
Hyundai Heavy Industries 3.73
SK 2.96
Korea Electric Power 2.51
Shinsegae 2.02
Samsung Heavy Industries 1.91
Samsung Electnc 1.87
Total 48.2
HIGHLIGHTS
In May 2007, iShares MSCI South Korea Index’s S&P Ranking was upgraded to 3 from 2.
Within the broader category of Global Equity funds, iShares MSCI South Korea Index was upgraded to a rank of 3 STARS from 2 STARS in June 2007. iShares MSCI South Korea Index is ranked among 22 Equity Emerging Single Country funds by S&P’s three-year and overall rank of this fund. Funds are ranked on three year Sharpe Ratio. A Star ranking of 5 is assigned to the top 10% that also outperform their benchmark over 3 years. Approximately, the next 20% are ranked 4; 40% are ranked 3; 20% are ranked 2; 10% are ranked 1. For a fund to be ranked higher than 3 Stars, it must also outperform the three-month Treasury bill over 3 years.
how can a foreigner open up a mainland trading account?
To be honest and straightforward, I cant help typing those words, shamed for those people who said china stock is going to collapse soon. look now in november 2007, the stock index has gone up to 5000+ now. what would you say when you look back to your comments in Jan. 2007?
i am a student and our teacher demanded us to write an article about stock market
after looing this i gained a lot thank you all
@ Vera:
Did you write an article about stock markets in general or about the Chinese stock market in particular? If the latter is the case, may I ask what your findings are?
I’m still struggling to find some sort of scientific approach to understand and explain the Chinese stock market…
I am from Beijing China, what you said is exactly right, I have lost lots of money in the stock market by 50% so far.
Could you tell me the procedure for a foreigner to make an account in mainland? please also provide the detail information. Thank YOU!!!
Where did you find that articles, I would like to read it.