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Jake's View
PUBLISHED : Thursday, 15 November, 2012, 12:00am
UPDATED : Thursday, 15 November, 2012, 5:02am

Fear not the retail investor - for now

Institutional buyers can drive stock markets to rallies and crashes but CSRC chief's warning may yet become a self-fulfilling prophecy

Institutional investors were most welcome, he [CSRC chairman Guo Shuqing] said, as they were more mature and had more expertise than individuals, who make up 84 per cent of the mainland's stock market participants and whose irrational transactions exacerbated price fluctuations.

SCMP, November 12

I'm not quite sure how the China Securities Regulatory Commission defines "mature" but I reckon that the average age of the individual investors who inhabit stockbrokers' offices is about 60, while the dealing rooms of institutional investors are largely staffed by kids fresh out of college.

Nor do I believe that the stock market transactions made by individuals in the mainland are irrational. Seen individually they may be, but put millions of individuals together and you generally get very rational thinking out of the group. Village decisions have a way of being consistently right.

I think the bigger danger actually comes from institutional investors whom the straitjacket of a university education has conditioned to think alike. In my view they do more to drive any stock market to senseless rallies and panic-stricken crashes than the retail punters do. Foreign institutions are particularly bad on this.

In the case of the mainland's stock markets, however, the retail trade appears to have been in the driver's seat. While domestic and foreign institutions have talked big about the limitless potential of Chinese equities, individual investors have noticed that the potential has taken a very long time coming and have pushed the market down.

The first chart shows just how far down this has been relative to China's gross domestic product. Rarely has any market been so out of synch with its underlying economy. One of these two is telling us lies.

In these circumstances it is understandable that the CSRC should want bullish-talking foreign institutions to come in. The CSRC is not actually a regulator. It is a booster. Its job is to get the market back up and its assigned technique for this is to fool the public that there is a watchdog on duty.

But it fools itself in thinking that inviting in more foreigners is the key to opening the mainland's capital account. The real key is actually the one that fits in the other side of the door. It is not letting foreigners' money in but letting the money of Chinese citizens out that will really constitute the big reform and Beijing won't countenance it. Central control over the economy would be lost.

The danger, however, is that Mr Guo's warnings about the irrational transactions of individuals may yet become a self-fulfilled prophecy. Deposit growth in mainland banks over the last ten years has averaged almost 20 per cent a year to a present level of 65.7 trillion yuan (HK$85.2 trillion).

The second chart gives you an idea of what an explosive growth of savings this has been. The mainland's deposits have grown eightfold over the period and now exceed in value the comparable M2 measure of the money supply in the United States.

This is an enormous tide of money to be bottled up within China's borders. It could easily swamp any domestic investment market if it remains dammed up this way. There is reason indeed for Mr Guo's fears.

It is himself he should fear, however, and his masters.

jake.vanderkamp@scmp.com

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SpeakFreely
Jake, for chart 1, I would not doubt the stock chart as it reflects the current and future earnings. Let me try to analyst why stock price has been down. Ignore that policy thinking. The issue is Chinese companies are not making money or enough money to justify the stock price. Why? Most of the chinese companies are having revenue of 10 to 30% growth yoy but the issue is costs. Increasing costs and competitive pricing driving down profit margin. That's explain why Foxconn price is dropping despite making more iphone too. Another point I want to make is chinese companies are not using enought technology to increase productivity vs its competitors. If u look at the top 5 chinese ADR in technology, 1 gone busted because of fault, the other 4 combined rev is around us$1b less than what Goldman or BAC spend in one year! That indicates Chinese companies is not spending money on technology. Maybe buying hardware but not on service making it works well. Without Technolgy it hurts efficiency and bottom line. The second issue is chinese GDP are mainly driven by investment building infrastructures that do not generate rev margin or immediate efficiency. 10 bridges will not bring more efficiency than 1 bridge?
The second chart maybe ur right but also you forget M2 of china has also outgrown US M2 meaning China is printing more money than QE3 by percentage too. I got that confirmed by chinese investment bankers too.
 
 
 
 
 

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