Foreigners absent
Anonymous. The Economist. London: May 17, 1997.Vol.343, Iss. 8017; pg. 85, 1 pgs
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Abstract (Document Summary)
During China's first bull run in stocks, in the early 1990s, foreign investors succumbed to
the temptation of the exchanges in Shanghai and Shenzhen. They got badly burned.
Now, Chinese shares are sizzling again. But this time, foreign money is on the sidelines.
The foreigners may be missing something. China has gone share-crazy. There are now
said to be 25 million-30 million individual stockmarket investors in China.
Full Text (687 words)
Copyright Economist Newspaper Group, Incorporated May 17, 1997
ONCE bitten, twice shy. Nowhere does that aphorism seem more apt than in China's
stockmarkets. During China's first bull run in stocks, in the early 199os, foreign investors
succumbed to the temptations of the exchanges in Shanghai and Shenzhen. They got
badly burnt. Now, Chinese shares are sizzling again. But this time, foreign money is on
the sidelines.
In the midst of an emerging-markets share boom, this may be surprising news. But after
earning almost nothing from the biggest economic miracle the world has ever seen,
foreign investors are not keen to leap in now. Joan Zheng, an economist in Hong Kong
for J.P. Morgan, an American bank, reports that even stock buyers who deem American
shares expensive are keener on Latin America than on China. Closed-end funds that
invest in China trade at record discounts to their net asset value, giving a measure of
their unpopularity amongst foreigners.
The foreigners may be missing something. China has gone share-crazy. There are now
said to be 25m-30m individual stockmarket investors in China. In several mainland cities,
crowds buying shares spill out of brokerages, blocking traffic. One taxi driver recently
boasted to The Economist's correspondent that he had made 20,ooo yuan ($2,400),
more than his annual salary, just that morning. (He still expected a tip.) Demand has
spilled over from Shanghai "A" shares, which only mainland Chinese may buy, to "B"
shares, which are supposedly reserved for foreigners. With most foreign institutions long
since out of the market, Chinese punters have broken the rules to buy these shares,
because they trade at a hefty discount to their A-share equivalents.
Late last year editorials appeared in the Communist-controlled press warning that tough
measures would be taken against speculation. Shares slumped by a fifth over just a
couple of days, which may have alarmed officials as much as it did investors. So these
days the government merely talks about throwing sand in the wheels by raising by a little
bit the stamp duty on share trading. It still regularly warns Chinese investors out of the Bshare market, but few take notice. For Chinese investors are still convinced that the
government will soon start easing interest rates again, giving a further boost to share
prices.
They are probably right. The economy is taking a worryingly long time to get over the
consequences of its 1992-93 boom and the subsequent contraction. Neither industrial
growth nor retail spending is strong. Meanwhile, there is huge excess capacity in many
sectors of the economy. China is trying, with some recent success, to export its surplus
production. Still, GDP growth has slowed to a 9.4% annual rate, from 14% four years
ago. The government is seeking to juice the growth rate up again. But a lot of the
liquidity that the central bank is pumping into the financial system, and a lot of the credit
that banks are extending, is going straight into financial assets.
Foreign investors with faith in the economy's resilience have a problem finding
something to invest in. The B-share markets in Shanghai and Shenzhen are tiny and
illiquid, and the transparency of company management leaves a lot to be desired. On
May 15th, the government signalled its displeasure with the wildness of the markets by
firing the chief stockmarket regulator. H shares, Chinese equities which trade in Hong
Kong, offer few choices and little liquidity. "Red-chip" shares, issued by mainland
companies that are registered in Hong Kong, would be a better bet-if it were not for their
outlandish prices.
That leaves Hong Kong companies that either have large interests in China, or have
stakes held in them by mainland entities. One Hong Kong stockbroker has christened
these companies, such as Hong Kong Telecom and China Light and Power, "pink
chips". Foreign investors helped the Hong Kong stockmarket to a new record on May
14th, suggesting that pink chips are now hot. It also suggests that, notwithstanding the
handover on July 1st, foreigners who hope to make some profit from China's remarkable
growth are wiser to try their luck in Hong Kong than in the riskier bourses on the
mainland.