Stock Market Fever

There has been a bit of news over here about the performance of stock market. The Shanghai Index has been crazy lately. After rising to a record high on Monday, it has fallen 10% this week, erasing all the previous gains for the year thus far. You shouldn’t feel bad for Chinese investors though, since the Shanghai index returned over 130% last year. Everyone over here talks about the stock market – how it’s expected to grow, or that it’s topped out and has nowhere to go but down. I can’t predict the future, but I can offer some thoughts as to why it’s been doing so well.

First, Chinese companies have not been well managed; they are after all former if not still mostly state-owned enterprises. But as the economy opens up and professional management skills are adopted, it is assumed that they will be more competitive. Second, the government has been slowly selling stakes in some of the largest companies, particularly in the financial services sector. The Bank of China, China Merchants, and the Industrial and Commercial Bank of China have all had their shares listed on foreign exchanges in the past year. The belief by investors is that foreign companies will acquire major positions in a bid to enter the Chinese market. Third, Chinese (and Asians in general) are savers. I don’t mean to be racist when making the comment, but Asian economies have significantly higher national savings rates than Western counterparts. The savings have traditionally gone into the banks (thus the huge number of banks and size of their assets.) However, Chinese households are looking for more places to put their money as they grow in wealth. Banks are capped (by the heavy handed regulatory body) from paying interest above 2.56%. Chinese citizens also aren’t allowed to invest in foreign securities (how are they supposed to buy them when they can’t convert their RMB into any currency?) The only place to put their money is in the domestic stock market. There are only so many companies in the stock market, since state owned enterprises are still dominant in a number of industries. So, with limited supply and growing demand for stock certificates, the prices have skyrocketed.

I don’t know where the market is going from here. But I somehow doubt a company like China Life is worth twice as much as MetLife ($100B vs. $48B) with one third the profits ($1B vs. $3B).