If you ever thought China was the new land of milk and honey and all one needed to do was invest there to make money, recent events may persuade you otherwise.
As you may have heard, China's stock markets are crashing, despite several steps Chinese policymakers have taken to try and stem the flow of red ink.
In the past month, China's Shanghai Composite Index has crashed down 31% while the Shenzen Component index is down 36.5%. Clearly, the run-up over the past year was overdone, with many Chinese stocks overvalued.
But the markets may have further to fall. Chinese regulators have the ability to suspend trading in a stock once it falls 10% in a day. Companies are also allowed to suspend trading in their shares simply because they don't want them to fall any further. According to reports, around 1,480, or more than half of China's listed companies have been suspended after US$3.6 trillion has been wiped off Chinese stock exchanges in less than a month.
The number and range of measures imposed by Chinese authorities so far are astonishing and includes:
- Cancelling the IPOs of 28 companies planning to list on the stock market
- Banning short sellers
- Major shareholders, corporate executives and directors banned from selling stakes in listed companies for six months
- Government institutions forced to increase or maintain their existing stock holdings in a bid to prop up prices
- Relaxing margin lending rules to allow all sorts of security to be put up to lend against
- Central bank cutting interest rates
- Allowed companies to suspend trading in their shares to prevent investors from selling
- Several large companies announced buybacks
The problem, as China's officials are finding is that they can't really control the market and the moves above appear to be desperate steps. To a market that's already jittery, that's not a sign of confidence. The measures listed above are having little impact, with the Shanghai, Shenzen and Hong Kong's Hang Seng Index posting large falls in the past few days and could continue to fall.
A number of analysts have also suggested Chinese markets are heavily manipulated and corrupt, but the bigger risks posed by government and regulatory intervention suggest most investors have plenty of reasons to steer well clear of Chinese stock markets.
It pays to remember that China is not a free market like many Western nations, with heavy government control over many aspects of life – as we can see from the interventions above.
The problem for Australian investors is that some of those country risks extend to Chinese stocks listed on the ASX – an issue we've highlighted several times here, here and here. It also applies to exchange-traded funds (ETFs) like the iShares China Large Cap ETF or ISHCHICAP CDI 1:1 (ASX: IZZ) and the Market Vectors ChinaAMC A-Share ETF (ASX: CETF), and Trustee for AMP Capital China Grwth Fund (ASX: AGF)
Buyer beware.
