In August 2005, CHINA ECONOMIC REVIEW decided to invest RMB10,000 in A-shares. And so the Red Dragon Fund was born…
If 2006 was the year of “money” and “technology,” then 2007 will go down as the period in which romance was supplanted by finance.
Search engines now regularly publish lists of the most popular search keywords, thereby giving us a snapshot of the Chinese zeitgeist. It’s no surprise that “stocks” took fourth place in the Google China rankings, surrounded by a bevy of the nation’s now publicly listed banks.
We might even venture to suggest that the only reason “QQ” came first was because people were looking for instant messaging services through which to share stock tips. After all, 2007 was a bumper year for China’s markets with record levels of public participation.
It’s a pity we can’t say the same about the beginning of 2008.
The Shanghai Composite Index (SCI) had a torrid time in the middle of January, slipping down into the region of 5,100 points just as everyone was pinning their hopes on a post-Christmas revival, when it earlier touched 5,500.
Unsurprisingly, fears of macroeconomic tightening at home and lackluster growth abroad were largely to blame. An increase in commercial banks’ required reserve ratios (the 11th in 13 months) on January 16 did little to help, as the SCI duly slumped 2.63% the following day.
Fortunately, we ditched China Enterprise (600675) – at only a minor loss after a timely bump in real estate stocks – and Bank of China (601988) the previous week. We wanted to engage smaller banks with more growth potential and took advantage of the subsequent drop in the market to move in for 1,000 shares in Bank of Communications (601328).
Our only other holding is Ganyue Expressway (600269). Things are looking up for Ganyue after it received a US$17.25 million subsidiary from the provincial government and its application to issue a convertible bond was approved.
Prior to the mid-January struggle, we were backing the SCI to cruise on to 6,000, buoyed by the fact that financial results season is approaching. Despite the macro concerns, we have no reason to doubt this. Inflation is tricky beast to tame but the fast currency appreciation in January suggests that Beijing is serious about dealing with it. Several analysts are now certain we will see the renminbi duck under 7.00 to the dollar in 2008.
Deutsche Bank is also bullish. It expects earnings per share (EPS) growth for the MSCI China to reach or exceed 30% in 2008. The projection is based on underlying EPS growth of 15%. Tax unification and currency appreciation will contribute 6 and 6.5 percentage points respectively, with the rest coming from asset injections and M&A.
We will keep an eye out for good things from agriculture, banking and new energy stocks, but steer clear of real estate following the sharp drop in property market trade volume in early January.
Finally, the regulator seems willing to do something about the innate unfairness in the IPO system.
As it stands, institutional investors can subscribe to large chunks of an offering and then bid up the price in the secondary market to maximize profits. The real losers are of course the retail investors who, deprived of shares in the IPO, flood the inflated secondary market.
Proposed changes to the subscription process as well as higher IPO pricing would go a long way toward fixing this.