The index gains may in part reflect the exit of some speculative funds from China's real estate markets. With few other investment alternatives, it may be that local punters have been taking their money out of real estate and chasing a rising stock index. In addition, there may be wishful thinking on the part of some investors for a summer rally, that traditional feature of equities investing in China in years gone by.
Whatever reason for the rise in indices, it is floating our ship as well as those of many other investors, but not without surprises and a couple of problems. Viewing the glass half-full, these hold-ups demonstrate that regulators are doing some pretty heavy lifting with a view to applying general principals to the sometimes messy situations one finds in reforming state-owned enterprises. At least let us hope that's the situation, or else we could all be in for a nasty surprise.
All dried out
Our strategy to reduce risk by increasing our investment in bank stocks has hit a short snag as trading in Huaxia Bank 600015 CH has been suspended since mid-April while the share reform continues to be sorted out behind the scenes. This is in spite of vivid pleas from small shareholders to resume trading. One investor noted that his mouth was dry over fears that a drop in the overall index would threaten the value of his shares in the bank, with him unable to trade his way out of it.
Although Huaxia's share price embodies a marginal gain from our last publication date it is axiomatic that mainland investors, deprived of the opportunity to trade for several weeks, will exit the stock, causing at least a short term price drop when trading resumes. In the meantime, all we can do is sit and worry – and try to remain properly hydrated! To the bank's credit it has published investors' remarks on its website, along with responses from the board of directors.
Minsheng Bank 600019 CH, perhaps reflecting a halo effect from the suspension of Huaxia, has seen its share price decline from just over RMB5.0 last month to RMB4.34 today. In addition to a possible halo effect, changes in bank A-share prices may also reflect adjustments in the prices of mainland banks listed in Hong Kong – China Construction Bank 939 HK took a dip although Bank of Communications 3328 HK remained largely unaffected. With Bank of China now marketing its Hong Kong IPO – and with shares due to start trading on June 1 – gains on China bank stocks may be capped in the short term.
We have seen similarly mixed performances in our agriculture stocks, Gansu Mogao 600543 CH and Xinjiang Guannong 600251 CH. Mogao has risen over RMB1.0 since our last publication date, making three straight rises since we bought the stock in March. Guannong has also posted rises but like Huaxia is now suspended as measures are taken in resolving its share reform issues.
In spite of these two stocks' exposure to favorable policy initiatives, including both rural development and expansion of the economic activities in China's western provinces, both companies recorded modest first quarter declines. For many Chinese companies first quarter is a slack season, so no firm conclusions should be drawn from this data. Perhaps there is little cause for concern – but we need to watch to ensure this doesn't become a trend.
So what to do? With half our portfolio suspended, the best course of action may be to order another bottle of sake, or perhaps we should switch to baijiu! Seriously though, our options for the moment are somewhat constrained. We will have to take at least a brief hit on Huaxia Bank when it recommences trading.
Meanwhile, selling any shares in Minsheng Bank would entail selling at a loss when in our view the stock still has some life in it, especially if Huaxia Bank recovers from the dip we expect when trading resumes. Accordingly, we're going to engage in constructive inertia, wait until Huaxia Bank and Xinjiang Guannong begin trading again and then consider our options once again.