Bulls Vs. Bears: Taking Sides On China
The Chinese mainland stock market rallied more than 150 percent in 12 months before it slipped by a third in the past month, just to rally again some 13 percent in two days. Chinese market action has been nothing short of a volatile rollercoaster ride, and now asset managers and global investors are scrambling to make sense of it all.
Opinions are certainly divided on what comes next, and what investors ought to do about their allocation to Chinese stocks. If there’s any consensus, it’s that there’s plenty to like about China’s economy long term, and plenty to fear about the trajectory of its stock market, the latest blog traffic shows.
Here are excerpts from some of the blogs circulating on China, including views from Mark Mobius, Wilfred Hahn, Barry Ritholtz and Ed Yardeni:
Bull
“About six months ago, I was asked about China’s market, which had been surging. At that time, I felt there could be a significant correction in what looked to be an ongoing bull market, but a short-term pullback wouldn’t be a big concern in terms of our long-term view on China. The question now is how much further is there to go in this correction. While I can’t predict what will happen next given all the uncertainty we have right now in the markets, we at Templeton Emerging Markets Group believe that China’s market decline is likely nearing the capitulation point, and that the investment story in China still remains compelling long term.
“In my view, the bottom line regarding the recent correction in China’s markets is essentially a story of too much euphoria and a natural correction. The government probably should have allowed the market’s early decline to run its course without additional interference that may have accelerated losses. I think it’s also important to note that the situation in Greece certainly had an impact on market sentiment in China, because investors there aren’t isolated from global news.
“While we are already investing in China, our strategy is to wait until prices are so attractive that it’s time to look for further long-term opportunities. We believe that point is close with some stocks, but we probably haven’t hit the bottom yet. In our view, the China story is still intact. China is still growing at a good pace, and we believe it’s an important global market that we want to have exposure to for the long term.”
Bear
“China seems to have inflated a stock market bubble in record time. The People’s Bank of China started to lower interest rates again in November and that seemed to have fired up the speculative mood in China. Many Chinese have a very high savings rate. And so they need to put it somewhere.
“For the past several years, Chinese investors have been putting their money into property, into real estate, buying second, third apartments that have been sitting vacant in these so-called ghost cities. But the government tried to discourage that kind of speculation, and raised the down payment requirements. And so, Chinese investors, with all this cash around, have been pouring into the stock market.
“They created a huge bubble in record time that’s bursting. I don't think this is a correction; I think this is a bursting of a speculative bubble. And the fact that the government is resorting to all these desperate measures—suspending trading and prohibiting selling—just worsens the prospects for the stock market. Who's going to want to buy into a market where the government can mandate that you can't sell your position? This is going beyond the stock market and creating a real credibility problem for the government.”
Bull
“China remains in a structural ’up’ market we think. It would be a mistake to jump off its equity market or currency during times of apparent crisis.
“Chinese financial markets only have three speeds—boom; bust or comatose. This is both a cultural characteristic as well as structural. The current volatility is hardly outside of historical norms. Chinese financials have been relatively stable as have the larger capitalization stocks that typically would be bought by foreigners. That partly reveals that the recent market downturn has been driven by local investors.
“Looking ahead, developing a reserve status for its currency (the yuan) and wide and deep equity markets are key reform strategies of the Chinese government. However, it is not necessary that stock markets soar at a pace of 150 percent a year to do so. By Western standards, 20 percent gains a year would be heavenly enough. Policymakers have learned their lessons from the last equity market boom (several times bigger than witnessed recently) in 2008. It ended ignobly.
“Are we worried about China’s economy? No. The Chinese equity market has never had any positive correlation to their economy. We remain attracted to the non-correlation of the yuan and Chinese financial markets, as well as the supportive outlook for Chinese equities. China is still expected to be added to the MSCI indices sometime over the next two years. That will put this 2nd largest stock market on the map for international investors. That will trigger a large demand for Chinese equities.
“But volatility will remain high and a standard feature of Chinese equity markets for some time to come.”
Bear
“A market, by definition, is a place where buyers and sellers can come together to exchange goods and services. That involves buying and selling those goods. Once you eliminate that free trading, you no longer have a market.
“Then there is China, where the authorities have suspended the sale of 72 percent of the A-share stocks. Lest you forgot, China remains a centrally planned autocratic regime ruled by the Communist Party. Niceties such as liquidity and free trading are deviant concepts. Pity Xiao Gang, the chairman of head of China Securities Regulatory Commission. The Wall Street Journal said he had ‘the toughest job in China.’
“Consider the long buyer in a market sell-off: They are catching the falling knife or anvil. They risk being early, and the trade is a money loser. Short sellers suffer no such disadvantage. Indeed, it is not much of a stretch to suggest that every short sale is a future buy. How ineffective are prohibitions of short-selling? Recall the ban in the 1930s—despite that, the Dow eventually fell 80 percent from its highs.
“When the A-share market reopens in 2016, a bigger question will remain: Why would anyone want to invest in a market where you might not ever be able to sell?
“China, which has made remarkable progress over the past 30 years, may have just set itself back a decade. Or we just found out we have been fooled by the regime's faux gestures toward capitalism. Either way, it will be interesting to watch this insane experiment unfold.”
