World Sings the Blues, but China's Investors Cheer
Thomas Crampton International Herald Tribune
Friday, December 22, 2000
HONG KONG While most investors worldwide are ushering out the year in a foul temper, China's shareholders are clinking their glasses in celebration.
Economic and political uncertainty has tortured stock markets in most corners of the world this year - except Shanghai and Shenzhen. In the United States, the Nasdaq composite index has shed 40 percent of its value, while the Dow Jones industrial average is off 10 percent. Europe has weathered the turbulence somewhat better while still suffering some sharp declines. But Asia has been pummeled, with prices falling as much as 50 percent in South Korea and 43 percent in Taiwan.
By contrast, Shanghai shares have soared as much as 125 percent, and prices in Shenzhen are up 58 percent.
"No matter how hard you look, China's stock markets are the sole bright spots in the investment universe today," said Guonan Ma, the Hong Kong based head of North Asia research for Merrill Lynch. "This will not go on forever, but it will last quite a while."
But the startling performance of Chinese shares amid the world's investment meltdown is intensifying worries about a possible speculative bubble driven by price manipulation and insider trading.
Some solid economic factors do support the markets' run-up: China's economy is booming, consumer demand is flourishing, corporate earnings are strengthening, and optimism is growing over the positive effects of the country's coming admission to the World Trade Organization.
Still, analysts express growing alarm that the markets may be set up for a nasty collapse. "The question of how much growth is due to fundamentals and how much is due to a bubble is not something you can even calculate with the Dow Jones or Nasdaq index," Mr. Ma said. "You certainly cannot separate these elements in the China market, which I like to say is still an emergent emerging market."
The Chinese markets, which have operated for only a decade, have suffered several speculative bubbles and dramatic collapses. In a particularly notorious moment in 1994, the head of the Shenzhen Securities and Exchange Commission, Wang Lin, fled for Hong Kong on a dubious passport when faced with charges of securities fraud.
The Shanghai exchange itself recently warned that stocks were rising partly because of systematic price manipulation through stock churning, insider trading and profiteering. A report, leaked from the Shanghai Stock Exchange and published in the financial monthly Caijing Zazhi, alleges that massive manipulation by China's fund management industry may be behind much of the bull market.
"It's become a widely known picture - in a stuffy sauna room, negotiators meet naked, with no possibility of a recording or disclosure," the publication said. "All commissions are paid in cash, with no signatures or receipts."
Most tactics described by the report are classic manipulations - such as price collusion and interfund trading - with historical roots on Wall Street and in European markets.
The report describes one scenario in which fund managers pay each other below-market prices for highly valued shares from their own portfolios. The reduced-cost trading of shares enhances each manager's overall returns. Caijing said that virtually all fund companies in China participated in such activities. Besides share manipulation, the risks to China's bull market include weak disclosure and the poor quality of listed companies, according to Mr. Ma and other analysts.
The Chinese buying spree is helping to create what may be the fastest-growing stock market in the world's financial history. China's listed stocks, excluding Hong Kong, have gone from a market capitalization of zero to $500 billion in a decade. Shanghai's A shares, which are available only to Chinese investors, have climbed 47.03 percent this year, while B shares, which are open to foreigners, have risen 139 percent. Shenzhen's A shares, which are open only to domestic investors, have shot up 73 percent over the same period, while B shares are up 47.8 percent.
China's stock prices are prone to a rapid ascent partly because of the huge demand for a limited number of shares. The government has kept a tight grip on the number of new listings, which has sent recent initial public offerings shooting skyward. Within the past month, Baoshan Steel's stock shot up 45 percent on its first day of trading, and the value of Mingsheng Bank's stock rose 70 percent within hours of coming onto the market.
It is this pent-up demand that has sent valuations soaring to a price/earnings ratio of more than 50 for Shanghai A shares, according to Fred Hu, head of the greater China economics and strategy team for Goldman Sachs in Hong Kong.
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