Betting on red: Chinese stock markets ‘overvalued and facing inevitable decline’
From Las Vegas to Macau and Monte Carlo to Sydney, gambling magnates are luring more Chinese their way. Gambling, you see, is illegal in mainland China.
Then again, who needs baccarat tables and roulette wheels when you have China’s stockmarket? China’s equity exchanges have long had more in common with casinos than markets. Investors were reminded of that on January 31 when China’s stocks tumbled the most in at least 21 months after a lawmaker said shares were overvalued.
The comments by Cheng Siwei, vice chairman of the National People’s Congress, fuelled speculation the government will act to limit investment.
Speaking in Dubai, Mr Cheng said only 30% of companies listed on the Shanghai Stock Exchange “are good to invest in by Western standards”, and investors in the remaining 70% will probably lose money.
His words sent the Shanghai and Shenzhen 300 Index, which tracks yuan-denominated ‘A’ shares listed on China’s two exchanges, down 6.5%, the biggest one-day drop since the measure was introduced in April 2005.
A couple of things are worth considering here. One, when you think about what Mr Cheng said, the biggest surprise is that Chinese stocks didn’t fall more. You have to wonder if his 30/70 comment is too optimistic given China’s lack of corporate transparency and government efforts to slow the economy.
Two, even after the January 31 plunge, this year’s gain is still 17%. No, that’s not a typographical error. If stocks had ended unchanged on that day, they would be up almost 25% in little more than four weeks. How is that not a bubble? “Every investor thinks they can win, but many will end up losing,” Mr Cheng was quoted as saying in the Financial Times.
Mr Cheng’s comments seem reminiscent of ones by Microsoft chief executive Steve Ballmer in September 1999. After Mr Ballmer, who was company president at the time, quipped that “there’s such an overvaluation of tech stocks that it’s absurd”, markets plunged.
To say “irrational exuberance” has crept into China would make Alan Greenspan’s catchphrase seem like an understatement.
Just as many investors wished they had heeded Mr Ballmer’s warning, bettors may regret not reacting more to Mr Cheng’s.
The popping of China’s bubble probably won’t hurt global markets the way the Nasdaq Composite Index’s implosion did in 2000. That episode probably has former Federal Reserve Chairman Greenspan wishing he had done more than just raise questions about bubbles in the mid-to-late 1990s. Why the Fed didn’t try to temper that exuberance will long mar Mr Greenspan’s legacy.
You can bet China’s central bank governor, Zhou Xiaochuan, is thinking about what he can do to return some sobriety to markets. Whatever China ends up doing, the bubble speaks volumes about the cracks in Asia’s No 2 economy — and misperceptions about its medium-term outlook.
Legend has it that Joseph Kennedy, father of former US President John F Kennedy, avoided Wall Street’s 1929 crash thanks to a shoeshine boy. Just before the market collapsed, Mr Kennedy received unsolicited stock advice from a young man polishing his loafers. Mr Kennedy, the story goes, got out of the market the next day, figuring stock enthusiasm had run wild.
In the late 1990s, similar omens came from New York taxi drivers and Miami bartenders offering stock tips or bragging about their day-trading gains. One hears such conversations in major Chinese cities these days.
Last month, I sat next to a British hedge-fund manager on a flight from Tokyo to Bangkok. The day before, while in Shanghai, he was buying DVDs from a salesman who said with a wink: “If you don’t own Tsingtao Brewery stock, you should get in now.” The hedge-fund manager, who refused to be quoted by name, called it his “Joe Kennedy moment”. The Shanghai and Shenzhen 300 Index has more than doubled in the past 12 months as government efforts to make over €150bn of state-owned stock tradable revived investor demand.
Economic growth that has averaged 10% for five years also helped boost companies’ earnings.
China doesn’t need more money rushing into its markets. It needs more mature markets, better transparency and more efficient mechanisms. That explains why China’s potential with institutional investors is yet to be fulfilled while the nation of €1.3 billion pulls in most of the world’s foreign direct investment.
Officials in Beijing and Shanghai should consider something else Mr Ballmer said in 1999, at the peak of the US stock bubble.
He said such high stock valuations are “bad for the long-term worth of the economy”. One can argue that after a long period of lacklustre performance, China’s share markets are playing catch-up. Yet the idea that a multiyear rally in Chinese shares is afoot lacks support from the underlying economy.
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