China shenanigans (part deux)

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China shenanigans (part deux).

Investing in the Chinese share market isn't for the faint hearted at present. A couple of months since we wrote about the speculative rally in Chinese shares, the bubble appears to have burst. Since reaching a peak around the middle of June, the Shanghai and Shenzen Composite Indices have corrected by over 30%.

As a reminder, China has two main stock classifications: A-shares which are stocks traded on the local exchanges and traded mostly by Chinese investors and H-shares that are traded on Hong Kong exchanges and available to international investors like us. While all Chinese stocks have experienced turbulence, the worst of the volatility has been largely concentrated in A-shares.

The turbulent events in the Chinese share markets have turned into a bit of an own goal for the Chinese authorities who had been active in promoting share market investment by individuals. The Chinese response has been heavy handed, unconventional and at odds with an ambition to have an open and transparent capital market. In an attempt to arrest the fall in the share markets, authorities have implemented a number of ad hoc emergency measures including a ban on new listings, short selling and selling by principal shareholders. They have followed this up by establishing what is now called a 'national team' of state institutions that have been actively buying stocks in order to support the market. Finally the regulator has become more active, urging investors to report any market misbehaviour on official hotlines (like the China of old) and actively suspending accounts of purported market manipulators.

The upshot is a high degree of uncertainty and this is reflected by ongoing volatility in the share market.

By actively buying up the market and preventing key stakeholders and other market participants the right to sell, the Chinese authorities have a manipulated share market that cannot trade to its fundamentals. We continue to monitor the market closely but given the high level of uncertainty are happy to remain on the sidelines until we believe fundamental value exists.


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