More UPS than DOWN
In the land of 3,500% stock gains, market crashes are quickly forgotten.
Fang Zhengdao set up shop on a rainy day in mid-November, a yellow umbrella in his hand and a handwritten sign by his side. Two months had passed since the great Chinese stock market crash of 2015, and Fang figured it was time to start peddling equities again.
That no one seemed interested in money-management advice from a 67-year-old man on a dingy street corner in Beijing didn’t faze him. He’d be back again.
“I’m doing this, helping others to invest in the stock market, because I want to make some money for them and myself,” said Fang, a retired government engineer who’s been trading local shares since 1994. “It will take no time for the Shanghai index to climb.”
As China’s US$5-trillion equity rout gives way to a nascent recovery, Fang is a symbol of enduring optimism among the country’s 97 million individual investors. Not only are oldtimers sticking with the market, novice traders have also been piling in every week since the crash. What’s more, some of the world’s biggest banks and money managers — including Goldman Sachs and Franklin Templeton Investments — say they are long-term bulls.
While an optimistic stance may be hard to fathom for observers of the gut-wrenching volatility in yuan-denominated A shares this year, the market has been a surprisingly rewarding bet over the long run. Twenty-five years to the day after the founding of the Shanghai Stock Exchange, the bourse’s benchmark index has delivered a 3,548% gain, excluding dividends. That compares with 348% for the MSCI Emerging Markets Index and 533% for the Standard & Poor’s 500 Index over the same period.
“If you look at the compound return for the A share market since it began in the 1990s, it’s actually not bad,” said Kinger Lau, a China equity strategist at Goldman Sachs in Hong Kong, whose latest 12-month forecast implies a 6% gain for the large-cap CSI 300 Index. “Maybe I’m biased, but I’m more forgiving.”
Of course, those returns have been fueled by one of history’s greatest-ever economic booms, a feat that is unlikely to repeat as China’s population ages.
For stocks to keep climbing as growth slows, the ruling Communist Party will have to follow through on pledges to improve the efficiency of state-owned enterprises and transform the primary driver of economic expansion from investment to consumption.
Mark Mobius, who’s been investing in emerging markets for more than four decades, says he’s confident that policymakers will deliver.
In September, the government announced long-awaited guidelines to make state-run firms more productive, stressing the need to reform “zombie” companies and accelerate efforts to increase the role of private shareholders. While short on specifics, authorities pledged to release details by year-end.
The economic transition, meanwhile, is already under way. Consumption accounted for more than 58% of China’s expansion in the first nine months of the year, versus 43% for investment. Retail spending climbed a faster-than-estimated 11% in October, while Alibaba logged a record 91.2 billion yuan ($14.3 billion) in sales during its Singles Day e-commerce promotion on Nov 11.
“Admittedly, it’s not going to be easy,” Mobius, chairman of Templeton’s emerging markets group, said in an interview in Bangkok. “But they are definitely moving in the right direction and that’s why it’s so exciting, because you see this transformation taking place.”
Sceptics worry that share prices already reflect a successful transition. The ChiNext index, China’s gauge of smaller consumer and technology companies, has a price-toearnings ratio of 81 times, four times more expensive than the small-cap Russell 2000 Index in the United States, according to data compiled by Bloomberg.
Sharp rallies in Chinese stocks — like the one that propelled the Shanghai Composite to a 60% gain in the first half of this year — have often been followed by extended periods of disappointing returns. The last downturn stretched for five years, with the benchmark index sinking more than 40% through the middle of 2014. China has had 55 bull and bear markets since 1990, more than six times as many as the S&P 500.
The frequency of boom-bust cycles partly reflects policymakers’ failure to lure foreign and institutional investors to a market where individuals still account for more than 80% of trades, said Fraser Howie, the co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.
International money managers cut holdings of mainland equities through the Shanghai-Hong Kong exchange link after policymakers responded to this year’s crash by restricting bearish bets, allowing hundreds of companies to halt trading and banning large stakeholders from selling their shares.
“The scary thing is, back then and now, you have the Shanghai Stock Exchange dominated by small speculative investors,” said Howie, who first visited the bourse in 1992 when it was housed in an old hotel on the city’s historic Bund waterfront. “Few would have believed foreigners would have such a limited role 25 years later.”
This year’s intervention is part of a “three steps forward, one step back” process of reform that foreign investors will have to learn to live with, according to Kai Kong Chay, a senior portfolio manager at ManuLife Asset Management in Hong Kong. The important thing, he says, is that policymakers seem to be learning from mistakes and pushing forward.
They’ve already started winding back some of the interventionist measures introduced during the crash, including a ban on initial public offerings and curbs on brokerages’ short positions.
Authorities are planning to adopt a US-style system for IPOs as soon as next year, and they’ve already started testing an expansion of the Hong Kong trading link to China’s second-largest bourse in Shenzhen.
Local investors have taken the volatility in stride, with the total number of registered individual investors climbing for 28 straight weeks to a record as of Nov 20. In another sign of optimism, traders are ramping up the use of borrowed money to increase their buying power. Outstanding margin debt on local bourses, which shrank by half during the crash, has rebounded for seven straight weeks as the Shanghai Composite rallied 25% from this year’s low in August.
For Fang, who’s been forced to liquidate his own holdings more than once during bear markets over the past two decades, the great thing about Chinese stocks is that they always seem to bounce back.
“I’ve seen it all, all the ups and downs,” he said. “I still have faith.”
“Admittedly, it’s not going to be easy. But [Chinese authorities] are definitely moving in the right direction and that’s why it’s so exciting, because you see this transformation taking place”
MARK MOBIUS Templeton Asset Management