s this the show that never ends? Of course, all markets go down eventually, it’s just that the bull currently dragging China’s stock market to new peaks seems immune to the tough regulatory talk that has traditionally been used to cool things down.
Zhou Xiaochuan, governor of the People’s Bank of China, had a go in early May, saying he was concerned about asset bubbles but the Shanghai Composite Index (SCI) still posted a 3% gain on its next trading day.
Then, on May 15, came the China Securities Regulatory Commission: "With the stock market becoming more brisk, more and more new investors who lack the awareness of risk are entering and market irregularities keep rising."
The SCI sank 3.6% to around 3,900 but, at time of writing, it was holding steady at 4,000.
We have to wonder if and when our old friend Cheng Siwei, vice-chairman of the National People’s Congress Standing Committee and the man who successfully talked down the market in January, is going to reenter the fray.
Piece of the action
The numbers are astonishing: a 300% rise in the SCI in two years and a 40%-plus increase since the start of 2007; nearly five million trading accounts opened in April compared to 3.08 million for the whole of 2006; more than US$9.1 billion transferred from savings accounts to the stock market in Shanghai alone between January and April.
While eavesdropping on a security guard the other day, we heard the following: "I’ve bought Wangfujing Department, it’s likely to hit the maximum trading increase in a couple of days."
The government has the ability to increase interest rates and bank reserve ratios. However, it might take something a bit more dramatic – a capital gains tax on stock sales, for example – to take the wind out of the SCI’s sails.
Some people were predicting 5,000 points by the end of May, 6,000 by the end of June…
Riding for a fall
There is evidence that might suggest the market is approaching its peak: the National Social Security Fund reduced its A-share exposure at the end of April; foreign institutional players and fund managers have started to cash out; and investment bank economists who kindly sent us their outlook reports argue, possibly without exception, that the stock market is overheating.
Back down to 3,000 points then, followed by the long-term plod to new highs? It’s possible. Indeed, by the time you read this it might have already happened. Volatility and the Chinese stock markets are nothing if not bedfellows.
It is because of these short-term risks that we have focused on turning quick profits. Get in, get rich, get out.
Jiangxi Copper 600362 remains a keeper but we made swift few hundred on Shanghai Petrochemical 600688 and Beijing Capital 600008.
We’ll continue to keep an eye on both these stocks as they look good as long plays. In fact, we bought Beijing Capital back in anticipation that it may launch a reverse merger with its parent company.
As you wait for the next twist in this stock market story, remember Warren Buffett’s rules of investment. Rule one: Don’t lose any money. Rule two: Do not forget rule one.