Intermission

The illogicality of the price swings makes investment in the market disheartening which, of course, is why the ordinary stock holders of China have not traded for years now.

A dismal history
In the mid- to late-1990s, there was a belief among many foreign securities companies that the foreign-denominated B-shares were floated by the state enterprises primarily to grab cash off foreign investors without any intention of providing a fair return on shareholder value. It is hard to argue with the general truth of that view with the B-shares at low price levels, low liquidity levels and still a significant discount to the A-shares.

The parallel view on A-shares (that they were primarily listed to grab cash off domestic investors without any sincere intention of providing a fair return on shareholder value) was not commonly heard at that stage. But nowadays it is a frequent refrain, alongside comments that the good companies are all listed anywhere but in China.

A disappointing present?
The Fund, valued on day one at RMB10,000 now has holdings in two companies – Baosteel and China Unicom. But both have fallen over the past month, which means that the total value of the fund, including cash holdings, now stands at RMB9,880. That is a 1.2% loss on the fund so far.

We are unlikely to be voted fund manager of the year at this rate. But then again, the aim of this fund was to provide a window into the vicissitudes of the China share markets, while also holding to a longer term optimistic view on their prospects.

The foreign investors appear to agree with this longer-term view held by your humble servants, the managers of the Red Dragon Fund. Over this past month, the China Securities Regulatory Commission announced an expansion in the quotas available for qualified foreign institutional investors (QFIIs) by US$6 billion, with which they can buy RMB-denominated stocks and bonds, and the interest level in the extra quota was high, in spite of all the evidence of fundamental disconnections between the overall economy and market valuations, and between the results and prospects of a company and its share price movements.

One of the reasons for the foreign interest, and for the upward tick in the main share indices, is the decision to push the state-held non-tradable shares into the market, in spite of the dilution and shareholder angst that such a move generates. Basically, the shareholders are being offered a good deal in terms of extra free shares to compensate them for the dilution drop in share values, and there is a general sense of relief that this problem, which has been hanging over the market for years, is finally approaching resolution.

Another announcement during the period revealed the establishment of an official fund valued at RMB6.3 billion to protect investors who get caught up in the downward spiral of bankrupt securities companies. We are confident, given the fact that the Red Dragon Fund account is held with China Securities, that we will not need to take advantage of this fund. But it is nice to know it is there, although given the continuing dire state of China's securities companies, it could well prove to be insufficient.

Awaiting the future
With two of the bluest chips – Baosteel and Unicom – falling, it makes buying decisions by the QFIIs difficult to make. There is surely no point in buying the garbage companies trading on anything but fundamentals that have been of so much interest to China's day-traders over the years.

So, Red Dragon Fund managers have decided this month to make no new purchases, to sit on their diminutive mound of cash and review the situation again next month.