It was a brief but bloody battle. On April 18, a group of diehard PetroChina (601857) shareholders tried to prevent the stock slipping below the RMB16.70 initial public offering price. It was a brave stand but ultimately they were overcome by a surge in selling.
PetroChina, which has the greatest index weighting, was one of a number of blue chips to suffer that day as the Shanghai Composite Index (SCI) fell 4% to close at 3,094.67 points. This is 49% – and seemingly a world away – from its peak of 6,092.06 on October 16.
Unsurprisingly, the mass exodus from the blue chips was initiated by fund managers who have been unwinding their positions for some weeks. Fund managers who bought so boisterously as the SCI hovered around 5,000 points were the first to sell out once the index slipped below 3,500. Now they are using this redeemed capital for speculative purposes.
Incessant speculation
According to the official statistics, there were seven funds with a stock velocity over 1,000% in 2007, with the highest reaching an astonishing 1,572%. And this was before the recent turmoil that has seen speculation reach a new peak. Are there any other mutual funds in the world where the managers exhibit such a manic obsession with short-term trading?
“Institutional investors are changing the structure of the market; they will be a market stabilizer as well as a key player in promoting corporate governance and enhancing competition and efficiency of the financial system,” Yao Gang, deputy chairman of the China Securities Regulatory Commission, said in February.
The fund managers are certainly bringing about change but we struggle to see it in a positive light. At the moment they are taking their money in and out of the market with all the sophistication of a novice retail investor.
Rather than subscribe to the views of Yao Gang, we have much more time for those Andy Xie, the Shanghai-based independent economist. Xie has been scathing of those who, having talked up the market in the face of rising valuations, now call on the government to help individual investors reclaim their savings.
Institutional investors and companies have both been irresponsible: the former in their attitude towards risk and the latter in their failure to fully disclose the contribution of stock market gains in what now appear to be deceptively high earnings figures.
Investigate those involved, root out the wrong-doers and use any cash seized to compensate the retail investors who got caught up in all this hype is Xie’s recommendation.
Questions are already being asked of Qinghai Salt Lake Potash (000792) where officials and relatives of officials from the Ministry of Housing and Urban-Rural Construction are alleged to have participated in insider trading.
Back in the game
Meanwhile, the Red Dragon Fund has become active once again – but this was not mere speculation.
China Unicom (600050) was introduced to our portfolio in mid-April in anticipation of the imminent restructuring of the country’s telecom industry. Unicom is set to benefit from the changes and the stock valuation is quite favorable.
The other new addition is PetroChina. The stock was acquired three weeks before mid-April’s mass sell-off as the funds and then the retail investors got cold feet. As a result, our holding has lost value in recent weeks, but we remain optimistic. Analysts have said RMB16.00-20.00 is reasonable trading range for PetroChina.
Also, we believe the fund managers’ decision to dump the stock is principally a ploy to buy back in at a lower level from retail investors who exit the company – and perhaps the market as a whole – in a disillusioned state.
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