China's market still sliding despite improving indicators

These are torrid times for the Shanghai stock exchange. The country’s key Shanghai Composite Index fell through the psychologically, and symbolically key support level of 2,000 points on November 27th.

It lost nearly 5 per cent in November, is down 10 per cent for the year and the number of transactions was at its lowest level since January 2008.

The index is heading for its third straight annual loss; that compares poorly with the Dow Jones Industrial Average in New York, which is up about 6 per cent this year, and London’s FTSE 100, which is up 4 per cent.

Even more pertinent perhaps, is that the Hang Seng Index in Hong Kong is flying ahead by 18.5 per cent.

This is all happening despite improving economic indicators, which show China on track to beat the government forecast for 7.5 per cent GDP growth this year and probably in line to do around the same in 2013. Chinese industrial profits surged 20.5 per cent in October, while factory output and exports both rose last month by the most since May.

There is a clear dichotomy between the economic fundamentals and the Shanghai Composite Index’s slide. The stock market, which only reopened in 1990 after four decades in the ideological wilderness following the communist revolution, has been on a rollercoaster ride in the past few years.

Five years ago, there were fears of a speculative bubble in the Chinese stock market after mainland investors transferred savings out of their bank accounts and into the market, pushing the index to 6,092.06 points on October 16th, 2007.

Overall, however, the stock market has not been kind to retail investors, who make up 80 per cent of those buying shares.

A study of 8,438 Chinese households by China’s Southwestern University of Finance and Economics published in May found that 77 per cent of those who had invested in Chinese stocks failed to see a profit.

Jing Ulrich, chairman of global markets China at JP Morgan, has pointed out how, by the end of October, 44 per cent of trading accounts with positions had been fallow for a year, which she said could be a sign that retail investors have lost interest in the markets.

Investors had been hoping for another sizeable bout of pump priming to stimulate the economy, but that has failed to materialise.

With returns looking low, investors have moved into new instruments like bond funds and high-yield wealth management products, which are seen as having state backing and are producing yields above inflation.

The China Securities Regulatory Commission has been trying to convince investors that now is a great time to buy Chinese shares, with price/equity ratios at bargain-basement lows.

However, analysts urge caution.

Many of the big shares, such as the banks, which are trading below their book value, are giving an unrealistic picture of the overall situation because they drag down the weighted-average P/E of the wider market.

So, without any stimulus in sight and with the jury still out on the prospects for reform, there is little optimism around that China’s domestic indexes will bounce back next year.