The dilemma facing the Red Dragon Fund, our barometer on the China share markets, was starkly illustrated this month when we called our broker, China Securities, to ask for advice on what to buy or sell in terms of A shares.
The analyst said that the outlook for blue-chip shares is not that good right now, and suggested a stock which has recently emerged from the purgatory of ST status. ST stocks are listed companies which have suffered 3 years of losses and face delisting if they do not achieve a turnaround. ST Bohai is the company, and as soon as we received the recommendation, the stock started to fall. Sigh.
5,000 years of history
Clearly it's now time for the Long Term View, a specialty here in China, where we have 5,000 years of history to choose from. Fortunately, we don't have to go back too far, since the period we want is interwar Shanghai, where the precursor to our beloved A shares was the second largest equities market on the planet and which served companies around East Asia as a source of capital.
From the beginning of the People's Republic's implementation of stock markets in 1991, regulators, investors, and listed companies have all been involved in a complex dialogue as each sorted out what a stock market is supposed to do.
Investors have moved from having no investment alternatives beyond bank deposits, government bonds, and stocks, to being able to choose from among a wider range of insurance products, owning their own homes, or buying big-ticket items like cars that offer quality of life rather than high savings.
The regulator has moved from a department of the central bank to a specialized force with expertise and almost enough manpower to actually follow up on what listed companies are doing. English – the international language of finance – is spoken, and returnees with foreign professional training now work in the CBRC.
What is changing now is the composition of the listed companies, which are moving from traditional state-owned enterprises to profit-driven organizations, some of which – including our trusty Baosteel 600019 CH – are world class competitors in their sectors.
In spite of all the progress which has been made, much remains to be done by investors, regulators, and listed companies. Investors must learn to balance risk and reward and especially to take at least a medium-term view. The regulator is now adequately supervising the stock market but much remains to be done on the policy side to deepen markets, and a truly independent judiciary to settle disputes fairly remains on the horizon. Corporate governance remains a work-in-progress: witness the number of former presidents of large banks now under investigation. So where are we now on that 5,000-year timeline we call China? All through the summer, A share indices have been bounced around by the government's plans to unwind the 70% or so of all A shares held by the State. The offer of compensation to offset the perceived loss in share price by holders of traded A shares set markets off in June, but when the excitement died down, shareholders took their funds elsewhere, making for a bouncy ride.
This volatility has extended to stock-picking, as only three of the top-ten gainers year-to-date were also in the top-ten gainers in the past month and only two of the top ten gainers over the past month were also in the top-ten for the past three months, indicating that investors are changing their bets frequently.
So, where to put our remaining RMB9,880 of widows' and orphans' money? Let's go back into Baosteel 600019 CH, which is still well-run even if the share price is down on poor steel prices. The share price has continued to fall into the RMB4.2 range, falling into a territory this stock hasn't seen since the bad old days of 2001, when the government first started thinking openly about selling its shares. Baosteel is now below both its 200 day and 30 day moving averages and recently was sold off on high volume, indicating that many investors without the stomach have taken their funds elsewhere and will leave Baosteel alone.