China doesn’t really seem to get this stock market thing

While our eyes are focused on the slow train crash that is Grexit, over on the other side of the world there is an interesting example of King Canute seeking to hold back the waves. In China they seem to be of the opinion that their overheated stock market, having gained over 100% in the last year, is supposed to stay there. If you’re one of those capitalist running-dogs that is going against the story looking to sell, well, you can stop what you’re doing right there. Hardened Western investors who went through the dot-com boom might ask themselves what the good reasons were for last year’s 100% heft in a generalised index[ref]this question being, of course, the one they failed to ask themselves in 1999 – ain’t experience and hindsight a wonderful thing?[/ref]

from Bloomberg
Shanghai Composite Index from Bloomberg

So they stopped people with a 5% or more stake selling, and the government lends money to people to buy shares 🙂 There’s something about the point of this whole stock market thing that is being missed here. The Chinese stock market is also a young market, it seems compared to other world markets there are a lot of retail investors buying shares on margin – what on earth could go wrong? This is classic New York 1929 bucket-shop trading. Maybe in a few decades they will  become sober index fund passive investors, but first they have to get the momentum-chasing speculator out of their systems.

China’s investing culture remains backward and immature.

Howard Gold

Markets elsewhere have been on a roll of a long time, and while Grexit is unlikely to hurt too much outside Greece this one could be the second shoe dropping. There seems to be a lot of ruin in China as it tries to reorient itself from its early 2000s economic model to something that matches the post Lehman-crash world. There’s a lot of ruin in most economies, and it doesn’t necessarily lead to trouble, but by its sheer size China could have big knock-on effects.

Better to be a dog in a peaceful time, than to be a man in a chaotic period[ref]May you live in interesting times is a good line, but not Chinese, so it’s not right to to use it for China ;)[/ref]

There haven’t been tremendous buying opportunities in the markets for two or three years now. But interesting times lead to interesting opportunities. There’s still too much zombie puffery inflated by easy money after the 2007 crisis. Emerging markets are probably where it’s at in 20 years’ time, and perhaps we will have more opportunities to pick ’em up cheap in the next few years if this sucker goes down. Of course, associated with that will be all sorts of other misery. I’m not doing a Dubya and saying ‘bring ’em on‘. China has big challenges ahead with the whole get rich before getting old thing, and I personally have avoided investing in it[ref]other than in generalised index funds[/ref] because I have no feel at all for the country – my preferences in emerging markets lean towards India, Latin America and Africa from a demographic point of view. Howard Gold is quite right to describe EMs as having gone down the toilet, but I’ll be surprised if they stay there for the ten years he is calling out. I don’t have enough EM exposure, because in the years after 2009 I was building a HYP. And I don’t want to be a dog…


10 thoughts on “China doesn’t really seem to get this stock market thing”

  1. I agree with you. China has never really been my main emerging market focus. Africa and Latin America appear far more attractive.

    Hence why I like Banco Santander (massive exposure to Latin America) and hold PZ Cussons and Old Mutual (very Africa-focused). PZ Cussons also has exposure to other Asian countries which I think more attractive such as Indonesia, Malaysia and Australia.

    Really the way the government has reacted to the recent sell-off does sort of shows why I don’t think China is that attractive risk wise. They still have not really gone through the birth pains of entering the globalised economy. They seem to be still in the gestation period at present. It will come eventually I am sure and their demographics do look attractive but until they are fully in-step with the global economy the risk seems far too huge for me.

    Of course, if the stock market does collapse I might open a small position in a China-focused investment trust. But only a modest holding!


  2. How exactly is the government stock market support in china different from the massive government stock market support in the west when the stock market fell?


  3. @DD interesting using individual stocks there – I’ve been an index guy in these markets. I guess there’s always FCSS for if you fancy dipping a toe i the water.

    @Neverland, it’s a damn sight more sophisticated and integrated IMO, inflating the money supply in general rather than shutting down this, that and the other aspect of the stock market. If you’re gonna meddle, go big or go home seems to be way to do it.


  4. The lack of transparency in China over the state of their economy always give me pause for thought. But I do have some exposure though my emerging markets tracker.

    I know some say the Chinese are culturally hard-wired to be gamblers, but I don’t think this is a mass punt gone wrong.


  5. I’m in Hong Kong at the moment so can see first-hand how the crash in China (and subsequent crash of HK’ s Hang Seng index), is affecting both friends and family. Many are relieved at what China has done to try to stop the slide downwards but realise it was probably not the best course of action, likely to make things worse. There are signs of a recovery (in HK anyway). My family are grimly hanging on!


  6. I’m just across the water from weenie in Macau and have been here several years now. Most of my assets are China dependent and I have been reducing exposure over the last few months with my FI exit approaching later this year.

    While the recent economic downturn has probably cost me in the region of GBP 500k I have to remind myself that volatility is the price I pay for the several years of huge gains. Indeed anyone already “in” at the beginning of the year is still doing very well.

    Naturally with only another 4 months before I choose FI the timing sucks but thankfully it will not impact on my plans, or at least not to a point I will choose to work longer.

    As far as investment in China, if you are looking longer term, that is 5/10 years and more I think you would be rewarded. Short term its gambling.

    Incidentally not mentioned often is the possible effect of the anti-corruption drive in China to the wider economy. How many deals are not getting done I wonder as businessmen lay low. I know VIP gaming here in Macau is down around 60% primarily due to this.


  7. @Simon – interesting that you don’t feel this is a mass punt gone wrong. I confess I don’t know enough about this market. It looks like the dotcom days to me. Being hardwired as gamblers is part of us all – it’s fighting that predilection which is hard!

    @weenie – hope it all works out! The Hang Seng index seems to have taken less of a runup and less of a hit

    @Parmine – that’s a good approach to take. The aim isn’t to get out at the very best point but to get out with enough 😉


  8. I would say this was pretty obviously coming. Nothing goes up 100% in a year unless it’s coming out of super-low valuations and bear market territory. Locking investors in is certainly an interesting way to deal with a correction and must hurt the confidence of institutional investors. However, memories are short and they’ll probably all forget in a couple of years, or even less if the market recovers.


  9. Judging China’s government moves in the economic world by our eyes is probably a mistake. We know what results we would want, but their government may have different ideas about the desired result.


  10. @ Weenie. Hi Weenie, I’m here too. Been a long, hot summer already.

    @ George. Absolutely right. The desired result is for the ruling party to remain in power. Forever.

    Invest in this place? Never mind the point that it would be financially dumb (from experience) but there’s got to be a line somewhere about being complicit in/supporting a regime that disappears activists, beats the weak, and jails it’s poets.

    Just saying.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s