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Stocks
Brief History | Risk/Return Profile | Differing Market Size | Differing Investor Psychology |
Risks Involved | FAQ | About Direct Pacific Financial Services, Ltd.
Shanghai is currently one of the hottest stock markets in the world. During
1996, local shares on the exchange were up an impressive 65%, but only citizens
of the People's Republic of China could have reaped such a stunning profit.
Foreign investors had to be satisfied with a 40% return. Why? That's just one
question that we will answer in this report on the Shanghai stock market. Please
note, the following is meant to be used only as a guide. Investors who are
interested in learning more about the market, or who are considering trading
Chinese stocks, should consult a local broker or financial advisor.
A Brief History
Shanghai's stock market is quite young, even by emerging market standards. In
1991, 42 years after the Communist Revolution closed the doors on the Shanghai
stock market, and 12 years after Leader Deng Xiaoping ushered in the new "market
economy with Chinese characteristics", the government decided to re-open stock
trading on an experimental basis, establishing two stock exchanges -- one in
Shanghai and one in the southern boom town of Shenzhen next to Hong Kong. The
trading in these "A" shares was only open to Chinese citizens - foreigners not
allowed. Then, in 1993, the government added "B" shares, for trading by
foreigners only - Chinese residents not allowed. The "B" shares are seen as a
way for Chinese firms to raise foreign currency capital, and for foreign
investors to participate in China's growth. (The "B" share market trades in US
dollars, while the "A" share market trades in the local currency.) Over the
course of the past six years, each market have seen good days and bad days, but
the overall direction of the markets has been positive.
Risk/Return Profile
In the investment world it is common knowledge that the potential for greater
returns carries with it the potential for greater risk, and China is a perfect
example. Investing in Chinese stocks is not for the faint of heart, and even
many seasoned investors have found it difficult to profit. Listed companies
provide only limited information regarding their operations and financial
position, while shifts in market forces can easily make today's profitable
company tomorrow's failure. Add to this the potential impact from government
intervention or announcements in the markets, which at times has pushed the
markets down 10% in a single day, and up dramatically on other days, and you can
see that the risks of buying Shanghai stocks are considerable. But there is also
considerable potential for profits. It is common for the price of some "A"
stocks to double or even triple in a
given year. The "B" market, by comparison, is somewhat more tempered. We did
witness a significant rise in "B" share prices at the end of 1996, but over the
previous two to three year the market had remained virtually flat. So long as
foreign investors have a long-term time horizon, the potential for profit should
at least match and probably exceed the risk potential.
Differing Market Size
Even though both the "A" and "B" markets both trade Chinese stocks, and very
often in the same companies, they are nowhere near alike, and they often move at
variance with each other. To begin with, the "A" market dwarfs the
"B" market in
almost every way. By the end of 1996, there were 287 companies with "A" listings
in Shanghai with a combined market capitalization of 125.4 billion Renminbi ($15
billion). "B" share companies totaled 43 with a market capitalization of 16.1
billion Renminbi ($1.9 billion). Average daily trading volume for the "A" market
during 1996 was 434 million Renminbi ($52.2 million) as compared to the "B"
market volume over the same period of 11.5 million Renminbi ($1.4 million).
These numbers give some sense of the great amount of depth in the "A" market as
compared to the "B" market, and this depth contributes to the difference in
performance with the "B" market. The differing views and strategies of the local
and foreign investment communities also affect the movements of the two markets.
Differing Investor Psychology
Foreign investors and Chinese investors are as different as night and day, or
rather east and west in this case. In the West, there is a great deal of time
and effort spent examining every facet of a company's fundamentals before
deciding whether to buy, sell or hold that company's stock. In emerging markets
it is rare to find investors following such a practice, and China is no
exception. Local investors trade largely on rumors and insider information and
pay little attention to the financial state of the companies concerned or the
economic factors influencing their business. It has been quite common in the
past for a western stock analyst to recommend buying a specific "B" share to
client, while Chinese investors in the "A" market are selling that same issue.
Simply put: if the share price of Lujiazui, a large real estate developer in
Shanghai, is rising on the "A" market, that does not mean the "B" share price
will rise as well.
Not only is there a difference between how "A" and "B" share investors trade,
but there is a difference in how long each investor holds their respective
positions. Savvy investors in the West know that if you buy a risky asset, such
as a Chinese stock, you should hold it for a longer period of time to offset the
volatility. Ask a local investor how long they hold a position, and a common
answer is three to five days. This is not to say there aren't any long-term
investor in the "A" share market;. But the vast majority would in the West be
considered speculators rather than investors. Once again this difference in
investment philosophies has cause the "B" market to perform quite differently
from the "A" market.
Risks Involved
As we mentioned above, there is significant risk involved for those trading in
Chinese stocks. Here we provide a recent example of just how risky Chinese
stocks can be:
During the first 11 months of 1996, the "A" market jumped 76%, while the "B"
market remained flat. Local investors were excited about the prospects of the
Chinese economy, the central bank had lowered interest rates, and a greater
number of companies were expected to report better earnings for the year.
Foreign investors, who had seen little activity in the market for the better
part of two years, did not share their Chinese counterparts' enthusiasm, and
decided to remain on the sidelines. At the beginning of December, local
investors began a frenzied buying campaign, in which the "A" market jumped 17%
in a single week, and there was even signs that foreign investors had begun to
buy. During that same time, the central government grew anxious that investors
had thrown caution to the wind, and that there was too much blatant speculation
in the market, so the government took some initial steps to moderate investors
eagerness. However, these steps did not work and by December 11th, as the "A"
market reached to 1,301 and the "B" market broke past the 80 mark, the
government intervened with a warning that the markets were overheated and that
the authorities would not help investors out of a stoch crash took place. In the
next three days, the "A" and "B" markets dropped by 27% and 25% respectively. So
while the markets performed impressively during the year, it is also true that
it did so with a great degree of risk.
Frequently Asked Questions
How do I buy Shanghai "B" shares?
You should be able to contact your local broker, and ask if your brokerage firm
can trade shares on the Shanghai "B" market. Most large brokers has a trading
desk on the Shanghai market.
Where can I find stock prices?
Most regional financial newspapers list the closing daily prices of the Shanghai
"B" shares. Only Chinese newspapers show the daily closing price of the "A"
shares.
Is there anyway to find information on "B" share companies?
Currently, it is very difficult to find any information on "B" share companies.
Regulatory practices in China are still being developed, so traded companies
only have to provide the bare minimum of information. You should speak with a
local broker or financial advisor if you are looking for such information.
About Direct Pacific Financial Services, Ltd.
This report was provided by Direct Pacific Financial Services Ltd., "Your only
source for 'A' share research". If you are interested in learning more about
either the "A" or "B" share markets, email us at dirpac@uninet.co.cn.
Investors wanting to learn more about the Shanghai market, and its
representative stocks, may want to consider buying our Shanghai Handbook. The
handbook provides a two page report on every stock traded in Shanghai, and
contains basic information on each company. We believe it to be a good starting
point for investors interested in the local market, and a sample report is
available for free. The handbook is priced at $499, and can be ordered via our
email address above.
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