Overpriced IPOs spell longer-term misery for A share investors
For 10 years a yawning chasm has existed between the performance China’s stock market and its economy, according to a veteran China expert, who likens the market to a casino – with all the risk that that entails for foreign investors.
Jonathan Anderson, a former resident representative at the International Monetary Fund for China and Russia and now an independent analyst, said the main reason for investors’ dissatisfaction with China’s stock market was the high valuation of Chinese equities when they listed.
“The (Shanghai A-share) index started at P/E ratio with something like 50 times earnings in 2000,” said Anderson. “Thirteen years on... you have, in fact, almost zero returns.”
Anderson, who also worked for UBS and Goldman Sachs as their lead analyst on China, told the CFA Institute annual conference in Singapore on Monday that some investors bought stocks for the wrong reasons - then complained about the A-share market’s failure to match the broader economy’s stellar growth.
Commenting on the contrast between the performance of China’s economy and its stock market, Anderson said there were “usually two possible explanations”.
“There is something wrong with the corporate sector or there is something wrong with the investors. Of course investors will never admit there’s something wrong with them. So the assumption is there must be something wrong with the corporate sector,” Anderson said.
“But today the problem in China is not the corporate sector. Actually the A-share market is like a casino,” said Anderson, who is regarded as one of the most experienced western economists focusing on China.
China’s economy grew by an average 10.5 per cent annually between 2001 and 2011, slowing to 7.8 per cent last year, but still far stronger than the rest of the world.
But its Shanghai benchmark index for domestic A-shares has struggled to stay above 2,000 after reaching a record high of 6,124 points in October 2007, about a year ahead of the Beijing Olympics, which was widely considered a showcase of the economic strength of China, which was already the world’s No.2 economy just behind the United States.
Anderson said many listed Chinese companies’ earnings growth actually matched the country’s economic growth, but their share prices were “naturally corrected” because they had been priced too high in their initial public offerings (IPOs).
“If you are an investor in (the) A-share market, you can never get paid by the macro story. You need to guess what investors are thinking and doing. That’s a lot harder than just to look at corporate earnings. It makes (it) extremely difficult for investors to make money in A-shares,” said Anderson.
Wu Shangzhi, chairman of Beijing-based CDH Investments, agreed that many companies were overpriced when they listed.
“I believe when they (the Chinese government) started the capital market, essentially it was because the government wanted to raise money to provide cheap capital for (economic) restructuring. That was their original goal,” said Wu, who is often dubbed by Chinese media as the “founding father of private equity in China”.
“They (the government) can control supply and demand (of stock offerings), and the valuation was high when they began (the stock market),” Wu, speaking in English, explained. “Today 85 per cent of the market (participants) are retail investors, so the fundamental valuation of the market is not there.”
Wu said some of China’s biggest IPOs in the past few years had been too highly priced so the share prices had to correct over time, but did not name any stocks or companies.