Not a happy time for China equities investors – but could the government step in and do something about it? The first quarter of 2008 saw the Shanghai Composite Index put in its worst performance on record, plunging 29%. Price-to-earnings ratios, at an average of 52 last October, now stand at an average of 27.6.
Aside from these lower valuations possibly re-igniting investor interest in the market (against the fact that bank deposits are earning negative real interest thanks to soaring inflation), there is also talk of potential government intervention. Is this a good thing? Depends who you talk to. Some argue that the government boosting the market means investors expect a similar course of action every time things turn pear-shaped – not the best way of creating a mature market. Others argue that government intervention (in some way, shape or form) is standard practice the world over.
Anyway, according to a research note issued by Jing Ulrich, chairman of China equities at JPMorgan, Beijing could do any one or a combination of the following:
– Approve more new mutual funds (see CER Feb 08) (this is already happening with more than 20 new funds so far this year following an informal suspension of new issues)
– Stricter rules on share sales (to ensure that only the best in new equity comes to the market)
– Tax cuts (in March, the Ministry of Finance suspended corporate income tax for mutual fund income)
– Reduce the stamp duty on stock market transactions (investors got a shock on May 30, 2007 when stamp duty was raised from 0.1% to 0.3%, prompting the SCI, which had risen by 62% over the course of May, slumped by about 20% in the space of a week)
– Increase the Qualified Foreign Institutional Investor quota (it’s already gone up from US$10 billion to US$30 billion and further hikes are expected)
– More verbal support for the market from the authorities
The last one is most exciting. Could it signal the return of Cheng Siwei, a man never afraid to voice his opinion on equities? Now untroubled by the burden of vice chairmanship of the National People’s Congress, Cheng might feel able to talk up stocks rather than talk them down. Let us not forget that this was the man who put “bubble”, “stock” and “market” into the same sentence in January of last year and sent the SCI tumbling 5% the following day. He followed this up a few days later by saying that 70% of listed Chinese companies are not worth investing in.
A stock market professional once told me that he worried whenever Cheng showed his face at a conference. With the SCI still bobbing around the 3,300-point mark, maybe it’s time Cheng generated some upward momentum.