Concise summary of the financial markets in China/Taiwan?
It is a little hard to have the full grasp of what has been going on in the financial markets in Asia. I was just wondering those who follow it more frequently than I do can perhaps give me a small outline of what's been going on and reasons for the movement?
I really appreciate this one guys.
The Shanghai index has risen over 500% since mid-2005 (http://www.forbes.com/2007/10/25/china-petrochina-baidu-pf-ii-in_hg_102…), which is the biggest rise of any stock market in recent history, including Japan in the 1980s and the NASDAQ from 1998-2000. The Chinese government recently opened up the stock market to mainland investors which has created further frenzy.
The companies raising all this money are mostly large, state-owned corporations in traditional industries like natural resources, energy, construction, etc. (unlike, say, the dot com boom). The financial market boom is underpinned by SOME solid fundamentals, such as double-digit GDP growth which is pretty insane for an economy the size of China's; the savings rate is also very high (40% or so) which explains where all this money is flowing in from. Then there's the massive trade surplus as well.
However there are a lot of issues with this growth and the stock market boom - beyond just the economic disparity and other results of the boom like the massive pollution problem, many of these stocks are not really supported by fundamentals (e.g., the average P/E is about what it was on Nasdaq in the dot com years and Japan in the mid-1980s... in other words, too high).
I read somewhere (don't have the source right now) that the majority of Chinese companies' earnings come from investing in themselves/other companies and then selling these investments for a gain - and with the market on fire like it is right now, it's no wonder their earnings are growing so much. But if that doesn't sound like a bubble, I don't know what does.
Overall the capital markets are still undeveloped and dominated by retail investors - normal people without much money, who treat it more like gambling than investing. Pretty much everyone expects some kind of correction, but no one knows whether it will be before or after the 2008 games.
To add a couple of things. The same firm may be listed in both Shanghai and Hong Kong, a freer market that is seen as more developed and open to foreigners. Of course, valuations will differ on each market. But the HK market grew a lot in 07, just not as much as Shanghai. Japan's had sluggish growth since its frenzy; interest rates are near zero. It's having trouble soliciting investment due to the fact that many Japanese firms don't seem to act in shareholder interests. Hence, the Nikkei contracting slightly in 07. It is also slated to increase cap gains taxes from 10% to 20% in 08 or 09. Singapore's a play on SE Asia, where Vietnam is growing at high levels and is seen as a potential massive low-cost producer (i.e another China). But the government is not nearly as sophisticated or accommodating as China, which hampers FDI and is a tailwind.
Oops, sorry for the tangentially related tidbits. Didn't fully read the title.
Bubble does exist, as the 2007 PE ratio of the overall market is around 50 and the PE of CSI300(Similar to S&P 500) is around 35.
The earning is growing at like 50% in 2007 and 30 expected in 2008. So the valuation is regarded as sustainable. However, approximately 15& of the growing of earnings in 2007 comes from investment in equity.
The reason for such a big boom in China is due to several reasons. First is the reform of equity ownership. Interest of big share holders now is in line of the small share holders. Second, China now has a liquidity problem after years of huge trade surplus and undervalued RMB. The export and fixed-asset investment is so strong that the GDP has been growing more than 10% for more than 3 years. Last,the Chinese love speculation and as the supply of quality stocks is not enough, price rises to a unacceptable standard comparing to mature western market.
Everyone now expects a nasty correction. But whether or when the government-lead stock market will collapse is unsure.
I am a Chinese and have been trading stocks for one year and a half. My experience is that, the classic theory and practise you guys have adopted in US will probably come to nothing in China...
Just my two cents.
I agree with the Chinese loving to speculate... I am in Taiwan for vacation and they love their tech analysis.
Thanks for everyone that replied. Great insight.
For those that know, starting from 1/1/2008, the Chinese govt is pushing for a new labor law that grants many employee benefits such as overtime pay, healthcare...etc. What is your view on it? And its impact on the foreign investors?
This will have impact to all companies that use China labor. One area that comes to mind is the consumer and tech sectors that employ much of their manufacturing in China. Expect companies to cut their earning estimates slightly. Any foreign investor with large positions in these sectors will likely be affected as well.
This will have impact to all companies that use China labor. One area that comes to mind is the consumer and tech sectors that employ much of their manufacturing in China. Expect companies to cut their earning estimates slightly. Any foreign investor with large positions in these sectors will likely be affected as well.
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