In 2007, we saw the Shanghai Stock Index went from 2,700 points to 6,100 points. A staggering 126% gain. The economy was going very strong, hot money was rushing into the country from global investment funds. Property market was also going good and the locals were taking a free ride on the fast appreciation of RMB currency against the USD. (From the 8.28 before de-pegging to the current 7.09)
2008, the Beijing Olympics year for China, is seen as another strong bull-run year. During the end of last year and even beginning of this year, 95% of stock analysts stated China stocks are going to shoot up from Q1 to Q3, surfing the Olympics wave and the RMB appreciation tide, and would only cools off in Q4 for needed technical correction. But since the Shanghai has swooned to the unbelievable 3,516 points today, the March 20th, 2008. What went wrong? What are still ahead of the China stock market?
I think 3 key factors have caused the present agony. First is the over-valuation of China stocks in the A markets in Shanghai and Shenzhen exchanges, which are only open to the local investors. The locals who were optimistic in the Chinese economy, in the last few years, took PE ratio of 30 times as very normal figure. Only those companies which posted 100 or more are thought to be overbought. Look at the Hong Kong Market and other developed nations' stock markets, anything beyond 20 times are positioned for selling. When Warren Buffett sold China Petroleum at HK15 a share, the locals were still rushing to buy the China Petroleum A stocks at RMB38. The over optimism of the China economy, strong future performances of local companies paid a heavy penalty now, as local investors realize now they have to see past returns as the solid 'rock' references and not to use the future promises as the 'sandy' foundation.
The second cause for the erosion of China market is the overlooking of the effect of restructured companies who are allowed to sell their holding of shares after 6 months or 12 months of their share floating. Many restructured entities past the 'Closed Window' periods and are given green light to sell their holding to the markets. Although the market index has gone to the pit bottom, an oversold position, but to many of these holding entities, their historical reference prices of their portfolio could be just 105 to 20% of the current share prices. They are still gaining multiple 100% even they sell off in the current market.
The sub-prime effect of the U.S. is the 3rd factor in pushing the China stocks down. In the past few years, many thought China as the single strongest developing economy with 1.3 billion population market would be self-sustainable, without being affected by the outside economies. But USA continues to be the major importer of China products. At this past 3 quarters of US sufferings from its sub-prime crisis, this western leading economy is on the edge of a fearful recession. This will definitely threaten the huge reduction in imports from China. In tandem with the RMB currency appreciation, the import prices of merchandises increase, posing a gloomy future for Chinese factories. Listed companies which rely mainly on exports are greatly affected in future revenues.
This is a connected borderless world. Company value perception, risk prevention and the problem of one nation such as the sub-prime crisis have all become global and international. Such is the new breakthrough realization of the Chinese stock investors.
