Would you be Bullish On the Chinese Stock Markets?

As I was making some housekeeping on my blog, I realised that I had highlighting the following article about Investing In China almost a year ago, back on May 18th 2007.

I would like to highlight that posting again:

• 1. watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action. The 45-year-old office worker stood in line at a bustling brokerage Friday to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up nearly 50 percent this year.
  
  "We still can make money," Ding said as she stood at the counter at Tiantong Securities with the paperwork for her new account. Asked what stocks she would buy, Ding said, "I don't know. I'm still learning."
  
  2. Economists say the government should take steps to moderate the price surge or risk a sharp fall that could hurt millions of small investors.
  "This is a very critical time. If policy adjustments take place now, the market can still have a sustainable development," said Hong Liang, a Goldman Sachs economist. "The longer they wait, the harder the eventual landing will be."
  
  3. Enthusiasm for stocks is fueled in part by a lack of other investments in a heavily regulated economy. Famously frugal Chinese families save up to 40 percent of their incomes, but bank accounts pay just 3 percent interest — less than the rate of inflation.
  
  4. "I have a stable income but in China now a stable income doesn't mean a good life," said a 26-year-old government employee who was opening an account at Tiantong Securities and would identify himself only by the English name Leon. "Seeing other people earning a lot of money, all you can think is, you're earning so little and how can you make more?"
  
  5. A 60-year-old cleaning woman in the southwestern city of Chongqing is being feted in the media as a market wizard after doubling her 20,000 yuan ($2,600) investment in two months.
  "At a time like this, who can lose money?" the newspaper Chongqing Morning Post quoted her as saying.
  
  6. The Beijing Youth Daily carried a photo of a Buddhist monk opening a trading account last week at a brokerage in the western city of Xi'an.
  In Nanjing in the east, a man in his 70s mortgaged his apartment to raise 60,000 yuan ($7,800) to play the market, the Web site Shenzhen News Net reported.
  
  7. "It might be dangerous, but who knows? People thought it was dangerous in March," Leon said
  
  8. Stock prices are 30 to 40 times earnings, an unusually high ratio for many major markets, which some say makes them unrealistic. "But that is not paying attention to earnings growth, which is very, very strong," Liang said.
  
  9. "We hear that before 2008, the government won't let prices fall," said Ding's sister, Ding Jingxian. "We're not afraid."
  
  And the most interesting point in my opinion is number 10.
  
  10. "We are opening 40 to 50 new accounts a day," said Zhang Jun, the branch's deputy manager. "Six months ago, it was four to five a day." Nationwide, the number of trading accounts has soared by 30 percent over the past year to 95 million, one-sixth of them opened in the past four months, according to the China Securities Depository and Clearing Corp., which is owned by China's two stock exchanges.
  On Wednesday alone, investors opened 552,559 new accounts, the company said.
  
  Source: 1st-time investors buy up Chinese stocks

See this clip also: http://www.tudou.com/player/player.swf?iid=6236614

And boy oh boy how the excuberance drove up the stock market.

On May 17th 2007, SSE was at 4048 pts. By Oct 17th 2007, the SSE index reached 6092 pts. An increase of 2044 pts or a whopping increase of 50% in a mere 6 months.

Here is an even more interesting view if you look at the SSE from May 2005 to Oct 2007.

However, as we all know, things did not turn up well. That the SSE has been underperforming is an understatement.

At this moment of time, the SSE is only at 3604 pts. Which is LOWER than what it was on May 17th 2007 when the SSE was at 4048 pts.


In my opinion, the decline was rather deadly. I mean, the SSE did NOT fall off the cliff but instead it was like rolling off a hill. And because it was rolling off the cliff and not falling off the cliff, I reckon that many did not realise how drastic the fall could be. And sadly, the longer the time pass, the decline eventually turned severe!


And this drastic decline was highlighted in the following posting, Chinese Stock Markets: The Day They Jumped!

• Published on Seattle Times. Chinese get a taste of investing's downside
  
  SHANGHAI, China — When emergency workers found Wang sprawled unconscious after having downed two bags of insecticide, he was still clutching the PDA he had been using to check stock prices.
  
  Like a number of other small investors in China, Wang had bet — and lost — his life savings, about $15,000, on the Chinese stock market. The propaganda office and doctors at the hospital where he was treated said the 36-year-old factory worker had been preparing to get married and that he had hoped to use the money to buy an apartment for his fiancée.Wang's attempted suicide and those of other investors are a heartbreaking consequence of China's great experiment in capitalism.
  
  In February, Li, a 25-year-old engineer, jumped from the seventh floor of the building where he worked in the city of Chengdu. His company said he had lost a huge amount on the stock market. On March 30, a 39-year-old former ice-cream- shop owner, also named Li, leaped to his death from his apartment building in the inland province of Shandong after losing a third of the $4,500 he had invested.
  
  As China's stock markets crashed over the past six months, the Communist government reacted in a way most consumer investors like Wang did not anticipate: It watched from the sidelines. It wasn't until last week, after the Shanghai benchmark index's fall to a symbolic milestone, below 50 percent of its peak in October, that Beijing finally stepped in.

However, as it is, it does look as if the worse is over for the Chinese Markets, right?

The correction that everyone was looking for has had happened and after the Chinese Government stepped in to stop the rot in the market back in April, the correction had stabilised, right?

So as it is, would one consider this an opportunity to buy in the SSE?

Some still don't!

Posted on CBS MarketWatch recently: Chinese stocks not attractive, even after correction

• But the investment newsletters I track are finding it especially difficult when it comes to China. On the one hand are newsletters who are predisposed to seeing huge opportunity in Chinese stocks, and who accordingly tend to downplay any evidence or objections to the contrary.
  
  On the other hand, some other newsletters appear to harbor an almost jingoistic aversion to investing in China. They accordingly tend to exaggerate the risks and problems that plague the Chinese economy.
  
  The debate on both sides reminds me of a famous remark attributed to Adlai Stevenson, the Democratic Party's candidate for president in the 1952 and 1956 elections: He was fond of mocking opponents by saying, "Here's the conclusion on which I will base my facts."
  
  It is against this background that I paid special attention to a recent article that John Dessauer devoted to investment opportunities in China.
  
  Dessauer, of course, is editor of the Investor's World newsletter. According to the Hulbert Financial Digest, the advice Dessauer has provided in his newsletter since the beginning of 1982 has produced a 10.2% annualized return, in contrast to 9.4% annualized (before dividends) for MSCI's Europe Australia and Far-East (EAFE) index.
  
  Dessauer earned his bona fides as not being knee-jerk against China over a decade ago, before investing in that country had become so popular. "I first visited China in 1994," he wrote in his most recent issue. "After that, ... I went back many times, visiting many of China's provinces. Starting in 1995, I began writing about the Chinese economic miracle, and I advised buying stocks in companies that were doing business in China."
  
  Does Dessauer consider Chinese stocks to represent a good value today, with the Shanghai Composite index trading at barely more than half its high set last fall?
  
  In a word, no.
  
  For starters, Dessauer is concerned about the speculative motivation of most individual Chinese investors in Chinese stocks, and what it would do to the prices of those stocks if and when they decide to pull out en masse. "The sixfold rise in Shanghai stocks happened at the same time that millions of new Chinese investors flooded into stocks," he pointed out. "At times, Shanghai stockbrokers were opening a million new individual accounts a week. Does anyone really believe these individuals are long-term investors?"
  
  Answering his own question, Dessauer continues: "It will be interesting to see how all those millions of individual Chinese who rushed to buy stocks on the way up will react now that the market has fallen sharply. My guess is that many will lose interest in stocks and go back to work to earn back their losses."
  
  In addition to being concerned about the speculative nature of the Chinese stock market, Dessauer also worries about the "lack of managerial talent in China. Mao killed or severely punished most intellectuals, or any talented people. An entire generation of managerial talent is missing in China. It takes a long time to create managerial talent. China has been making progress with education and training but the problem is still far from solved."
  
  A third source of concern for Dessauer is "the difficult issue of guanxi, the intertwining of personal and business relationships, which leads to what we would call corruption or nepotism. In China, it has become ingrained that you combine personal and business relationships... I have visited many companies in China -- public, private and state-owned. The business culture is slowly changing, but it is still common to find high-level managers who do not know what 'profit' means, never mind shareholders. There is still a question about who owns what ... If you are still tempted to buy Chinese stocks, take a look at one or two prospectuses for Chinese companies. That is a sobering exercise that should curb your enthusiasm."
  
  Instead of investing in Chinese companies, Dessauer says that the preferable way to profit from the Chinese "economic miracle" is by investing in "established companies from the developed economics that are succeeding in China."

Interesting views made by Mr. Dessauer, yes?

But what about views from folks like Jim Rogers? Mr. Rogers has been a constant bull on the Chinese Markets for so long already.

For example on March 17th 2007, I made the following posting, And what about Jim Rogers Views?

• "I've sold out of emerging markets except for China," said Rogers, long a prominent China bull.
  
  Even in China, the world's fastest expanding economy, Rogers said stocks were overvalued and could go down 30-40 percent.
  
  But he added: "China is one of the few countries in the world where I'm willing to sit out a 30-40 percent decline."

And in the posting, How now my dearest Moo Moo Cow?

• "I own Chinese shares. I'm not selling Chinese shares. If the Chinese stock market doubles again this year I'll have to sell, because then it's a full-fledged bubble," he told a media briefing after a speech in Hong Kong.
  
  "If it goes down 50 percent this year I will buy a lot more Chinese shares. I'm not smart enough to know what it's going to do, but I'm not selling China at all."
  
  "There's no question that PEs (price to earnings ratios) in China in the A-share market are too high for some companies, but that doesn't mean it can't get much worse. When you have a bubble develop, crazy things happen," he said.
  
  "The Chinese stock market could double this year, even though it's expensive right now."

And in Novemeber 2007, And What Does Jim Rogers thinks Now?

• But I'm gearing up. I didn't put in any orders for tomorrow but I'm starting to prepare my list of things to buy in China. Whether I buy this week or this month or this quarter, who knows. But I'm starting to think about buying new shares in China for the first time in a while. And I'm not thinking about buying in America."

And just last month, it was posted on Bloomberg that Investor Jim Rogers Buys Chinese Shares as Market Hits `Bottom'

• April 27 (Bloomberg) -- Investor Jim Rogers is buying Chinese shares, among the world's worst performers this year, as the market has bottomed, and he's focusing on agriculture, tourism, airlines and education.
  
  ``All my new money goes to commodities and China,'' said Rogers, who co-founded the Quantum fund with George Soros in the 1970s and correctly predicted the start of the commodities boom in 1999. He spoke at a seminar in Beijing yesterday.
  
  ``All the panic looks like a bottom,'' he said. ``I have bought in the last four to five weeks. I've been buying shares in China for the first time in a long time.''
  
  China's benchmark CSI 300 Index plunged as much as 39 percent this year, becoming at one point the world's second- worst performer, amid speculation government steps to quell inflation would hurt corporate profits. The index is a measure of shares traded in Shanghai and Shenzhen.
  
  The stock market, the world's fourth biggest, surged almost six-fold in the two years through 2007, driven by optimism growth in the economy would boost earnings.
  
  The slump triggered government moves to support the market, with the latest taking effect April 24, when the tax on stock trading was reduced. Chinese stocks jumped 9.3 percent that day, the most since Oct. 23, 2001, helping lift the index to a 16 percent gain last week.
  
  Analysts Differ
  
  Some analysts remain unconvinced the measures will have an effect with Morgan Stanley and Credit Suisse Group last week saying China's shares are a ``sell.''
  
  ``Given earnings deceleration, we do not think such a rally can last,'' Morgan Stanley's Jerry Lou and Allen Gui wrote in a report April 25. ``The government's cut of the stamp duty seems to suggest that it is running out of silver bullets.''
  
  Chinese companies' Hong Kong-listed `H shares' are more attractive than yuan-denominated `A shares,' Credit Suisse's Vincent Chan wrote in a separate note.
  
  Selling Chinese shares in 2008 ``is a big mistake,'' said Rogers, adding that he had also bought stocks in Singapore, Taiwan and Hong Kong. ``I have never sold any Chinese shares.''
  
  Rogers said he bought shares related to tourism and education, which ``in China will continue to be a major industry.'' Other investments include those of airlines, water companies and agricultural producers, he said.
  
  ``China has a huge agricultural problem,'' Rogers said. The ``government is doing everything it can to revive the agriculture industry.''
  
  Yuan to Climb
  
  Rogers was bullish on the Chinese yuan, saying it could eventually rise to 2 yuan per dollar.
  ``Don't sell your renminbi, because it will go a lot higher in the next 20 years,'' Rogers said.
  The yuan has gained more than 4 percent against the dollar this year, after climbing 7 percent in 2007. The currency traded at 7.01 to the dollar April 25.
  
  Rogers traveled the world by motorcycle and car in the 1990s, researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''

How now my dearest MooMooCow?

Would you be as bullish as Mr.Rogers is on the Chinese Stock Markets?