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Time To Consider Chinese Stocks at Trader’s Narrative

Time To Consider Chinese Stocks

How’s this as a strange contrarian indicator for the Chinese stock market? This is a billboard advertisement for Yinji Shopping Mall in Zhengzhou featuring a hanging mannequin next to a graph of the stock market:

yinjing mall china hanging man stock market investing

The agency behind the billboard explain that they are making fun of the Chinese stock market. In Chinese, the billboard reads:

It’s better to invest money here than put it into the stock market.

What I’d like to ask the agency is why do they have the graph going up if they are making fun of the market’s fall?

The Shanghai Composite has fallen 72% from its high on October 16th, 2007. Compare that with 45% for the S&P 500 Index (from its high on October 2007 to the low in October).

This mention of Chinese stocks in the most recent edition of Barron’s caught my attention:

We have 10% of our equity holdings in companies outside the U.S. We have a huge database covering 59 countries and every stock with a market cap of more than $200 million. One of the countries that looks really interesting is China. There are still 214 Chinese companies that have more than $1 billion in market value. The mean P/E on those stocks, as of last week, was 13, down from a peak in 2007 of about 56 times.
In China, you are going to see slower gross-domestic-product growth of maybe 5% or 6%, down from 9%, but there are some extremely attractive values there. And although people say you are trying to catch a falling knife, the Shanghai index is down 75% from the peak in October of last year. So China has become our largest holding in terms of emerging markets.
Steve Leuthold

Leuthold is one of the “greybeards” - market players who have seen and know a lot. So you’ve got to respect his views, even if you don’t defer to them.

Way back in May 2007, much too “early”, I began to suspect the Chinese equity markets were in a speculative bubble. When the Chinese government increased the stamp duty, for all intents and purposes, it was the death knell for the Chinese stock market. It took a few months and prices went parabolic in those final months - as they always do just prior to an implosion.

shanghai composite 2008 bear market finished

Previous bear markets:
Measured by the Shanghai Composite, here is a list of previous declines from the year the market topped to how much it fell:

1992 — 72%
1993 — 77%
1994 — 49%
2001 — 55%
2008 — 72% (so far)

Here are a few ways to get Chinese exposure:

  • Morgan Stanley’s China A-Share Fund (CAF)
  • Taiwan Greater China Fund (TFC)
  • The Greater China Fund Inc. (GCH)
  • China Fund Inc. (CHN)
  • JF China Region Fund Inc. (JFC)
  • SPDR S&P China ETF (GXC)
  • iShares FTSE/Xinhua China 25 Index (FXI) — Edit: thanks Greg

All except the last are closed-end funds, so they may not trade at their NAV. Also, CAF is the only way I know that outsiders can get in on the A-Share’s market.

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6 Responses to “Time To Consider Chinese Stocks”  

  1. 1 Poohbear

    A rule of thumb is when bubble bursts it usually drops back to the ‘root’ where it starts. Isn’t the ‘root’ level more likely to be around 1000 - 1200?

    A serious problem in Chinese market is each month huge amounts (aggregate amount larger than the current circulation) of ‘non-circulation’ shares becoming eligible to be sold onto the market. Most of these shares were bought by state-owned enterprises when the public companies were ‘reformed’ into limited-liability corporations. And the initial costs of these ‘non-circulation’ shares were virtually zero. This means regardless of the current stock market level, there will always be huge amounts of shares waiting to be dumped onto market as profit taking!

  2. 2 Babak

    interesting, I didn’t know that. Do you think the Chinese government will put a halt to that? they are very active in massaging the stock market, with stamp taxes and jaw boning it, etc. So you think it can fall to 1000-1200? The long term chart shows significant support at ~1750.

  3. 3 Joe

    Babak. A very nice site. Solar stocks going up on an apparent Democratic win ?

    aside: I went to your ABOUT section and tried a custom Google search. Got an error.

  4. 4 pej

    Many thanks Babak, this is a great post. And thanks Poohbear for the valuable info as well, I wasn’t aware of this at all neither.

  5. 5 Greg Feirman

    You can trade China via FXI as well.

  6. 6 worldtrader

    The government will not stop those shares from “circulating.” Because the executives and beneficiaries of those shares are all ex-government or friends/family of government.

    As the Communist government slowly transforms itself, the wealth of the state industries will be transferred into the political power elite through private equity ownership of old state enterprises. And those new management (old guard with new incentives) will run the state enterprises more efficiently and for profit (their own pocket).

    That said, there will be many savvy investors willing to take over any shares that hit the market. But again, don’t expect a sky-rocketing 600% ride up in the next few years as there is considerable overhang of sellers from 2000 to 6000 in the Shanghai Index.

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