Markets go up, markets go down… apparently even in China | FT Alphaville

Markets go up, markets go down… apparently even in China

Chinese equity markets are nuts. And the search for a narrative to explain this week’s moves is becoming ever nuttier. As Deutsche said: “It ceased to be a free market a long time ago so analysing it is tough”.

Since we can’t yet provide you with a decent narrative — rather than an occasionally ridiculous menu which butts up against the idea this is a largely controlled market within which there are rumours “that leveraged funds through illegal channels are dumping shares” — have some sentences about Chinese stock market volatility. They go nicely with today’s swings.

After dropping some 5 per cent near the open, the Shanghai Comp rallied on heavy buying of state owned banks to close down 1.7 per cent. As the FT says, at “its intraday low the Shanghai index was approaching the nadir of 3,507 points it hit on July 8, when the government announced a raft of measures to prop up a market that had collapsed more than 30 per cent in less than a month.”

Rather obviously, such nuttiness is reflected in the underlying and has been for a while. Via Macquarie, with our emphasis:

The A-share markets are extremely volatile and the violent flow of liquidity distorted the situation further over the last 9 months. This does not only apply to small- to mid-cap stocks. The swings in big-cap names can make jaws drop, literally.

Take China Shipbuilding Industry (601989.SH), as an example. It is the largest company in the Red Book [Macquarie’s new research thingy which covers non-rated companies listed on the Shanghai and Shenzhen stock exchanges], with a market capitalization of Rmb260bn and daily trading volume of Rmb18bn. From the beginning of the year to June 12, it has almost doubled; then it halved between June 12 and July 8; and rebounded by 66% over the last two weeks. It is trading at a 2015 PE multiple of 93x with projected earnings growth of 38%, according to Factset.

China National Nuclear Power (601985.SH) went public on June 10, two days before the big market began to crash. It has a market capitalization of Rmb190bn and daily trading volume of Rmb16bn. It rose 44% on its first day of trading, as maximum price fluctuation does not apply on the first day. Then it hit the 10% maximum price rise for 11 days in a row. During July, it hit the limit eight more times, but five times on the downside (-10%) and three times on the upside. Only three stocks in the Red Book currently exceed their June 12 stock prices. Wangsu Science & Technology (300017.SZ) and Sanan Optoelectronics (600703.SH) were both up 4%; China National Nuclear Power (601985.SH) was up 106%.

So, yeah, fair play if you’re in there.

Btw, it’s still unclear on how large an impact this might have on the wider Chinese economy. The headline figures where wealth effects and financing are concerned are indeed somewhat comforting — as Nomura say, 1) the household savings rate is quite high (around 40% of disposable income); 2) equity assets comprise only a small fraction of total household assets; and 3) year to date, China’s equity market remains in positive territory while, per Nomura again, financing through equity markets only accounted for 4.1 per cent of aggregate financing in H1.

But, as we wrote yesterday, the linkages in China’s economy, which we really doubt are all known, make us v wary.

We’ll get back to you when we know if this is the government stepping out of the market, losing control, or, maybe, having a disagreement within itself.

Related links:
Quick hits on Monday’s drop – Balding’s World
TANSTAAFL, China equities and the wider economy edition – FT Alphaville
The good news in China’s stock market plunge – Bloomberg View