HindustanTimes.com

Tuesday, September 30, 2003

Why booming China has a slumping stock market

Reuters
Shanghai, September 30

Ask small investor Xu Xiangying how she's profiting from China's economic
boom, and she laughs bitterly.

"What's the point in buying any more? You might as well say goodbye to your
money. It's frightening," said the housewife, summing up the prevailing mood
in stock markets that were Asia's darlings through 2000 and much of 2001,
but have been the worst-performing in Asia this year.

"Isn't it ironic that the economy is doing so well and stocks so badly. I'd
put all my money in Hong Kong if I could," she added before tottering off to
a card game at the other end of a dingy Shanghai trading hall.

The world's fastest-growing major economy houses Asia's worst-performing
stock market and the world's worst-performing emerging market this year -- a
perplexing weakness that analysts see persisting for years.

The Shanghai composite index has shed 17.9 per cent since mid-April to
around 1,355, versus a 30.4 per cent rally in neighbouring Hong Kong over
that period. It is down 0.2 per cent this year -- the only Asian index in
the red in 2003. In the rest of the world, only the Dutch market, down 3.2
per cent, and the Finnish market, down 1.1 per cent, have performed worse.

Even as HSBC and Citigroup celebrate the first-ever foreign investments in
the country's main stock and debt markets this year under a landmark
Qualified Foreign Institutional Investor scheme, analysts predicted the
index would stay locked between 1,350 and 1,500 points for the rest of 2003.
Old problems of sky-high valuations and patchy disclosure have been joined
by a swathe of new share issues, uncertainty over tighter lending rules and
a clampdown on market corruption.

"China all along has been very famous for having a very good top-down story,
but it's difficult to buy stock," said Eddie Wong, ABN AMRO's chief Asian
strategist.

"It's not a surprise when the economy is driven by capacity expansion --
investment... You cannot earn money."

MAXI INVESTMENT, MINI PROFITS

A lack of viable options means investors -- who have $1.3 trillion in
savings and who cannot invest overseas -- have driven prices to an average
of 37 times historic earnings versus Hong Kong's 16.5.

That's partly why analysts say markets are unlikely to crawl out of their
slump soon, despite economic growth that is expected to hit eight percent
this year, following a decade of seven percent per year growth in real GDP.
The seeming contradiction between stocks and growth was partly the product
of an investment zeal that had spurred economic activity, but neglected
bottom lines, economists say.

Autos are a case in point. China's 14 largest auto makers, who have almost
doubled output this year, were sitting on 22 billion yuan ($2.7 billion)
worth of unsold vehicles at the end of July.

A KPMG study found that there could be overcapacity of 2.3 million units by
2005 as the likes of General Motors Corp and FAW Xiali Automobile, a partner
of Japan's Toyota, ramp up output, threatening to wither profit margins.

"Growth is driven by investment. So the growth performance is always quite
extraordinary, but it's not always matched up by profitability at the micro
level," said Citigroup economist Yiping Huang. "For the stock market to go
forward in a more sustainable way, the market itself needs a major
consolidation."

BEIJING APPLYING THE BRAKES

Recognising the danger of overheating, Beijing has recently begun to apply
the brakes -- ordering a tightening of loans, delaying IPOs and limiting
capital inflows, just to name a few.

Ironically, that actually sparked a rush of IPOs in recent months. Markets
have struggled to absorb more than $1 billion in initial share offers over
the past month and a half, including a $604 million issue by Huaxia Bank Co
Ltd.

"They know there's a problem, so they want to catch the last train," ABN
AMRO's Wong speculated.

All of which is scant comfort to the average small investor.

"The market is just crazy. There are no rules and no accountability. We
can't even trust companies to report results accurately," said 50-year-old
Guo, who loiters around the darkened trading hall on his lunch break.

"I've lost 30,000 yuan in the market since 1992," Guo said. His wife nudged
him and said the figure was closer to 50,000 yuan.

© Hindustan Times Ltd. 2003.
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