Following the destruction of China's stock market bubble after 2007, investing and
speculating in the local real estate markets has been the big game in town. The Shanghai
Composite never recovered the bubble sheen after the crash and is still trading nearly 65%
below its peak. Since then, only fools have rushed in where Chinamen have feared to tread.
Even in its heyday, the Shanghai was primarily a vehicle to build cash kittys to play the
real estate market. There have been some good stock market trades over the past five years,
but it has been evident that those mercantilist goldbrickers Hu and Wen were not interested
in establishing bona fide capital markets. As you have been reading, mr. Xi , the new
president, is starting to fashion a long term plan to legitimize China's capital markets and
to determine the role of the yuan in the global currency markets.
So, I have been re-benchmarking the Value of China's shares by admittedly top down
western techniques. I have dropped the Shanghai index and am currently using the S&P
China SPDR tick: GXC. This ETF represents a very broad composite of established and
tradable shares and has been up and running since 2007 GXC Chart
By its own admission, China does not revere the accuracy of its macro data and reams of
micro data as well. This lack of precision suits my back of the envelope style of model
building anyway and the results are I think, reasonable enough. With 7% GDP growth
as the principal assumption, I rate the GXC as fairly priced at a value of 80, a level it has
struggled to reach in recent years. I also see the GXC as offering some significant longer
term value down around 65 (Check the chart link).
The recent quick run - up to near the 80 mark on the GXC reflects a positive reception to
the new Xi / Li reform program which is bigger, broader and more liberal than many were
expecting. It does not reflect the acceptance by investors that China can indeed grow at
7% or better in real terms going forward. Indeed, China has threatened its own economic
future by allowing far too rapid liquidity and credit growth since 2000. Messrs. Hu and Wen
and their deputies have put the country in harm's way well before such formidable issues
had to arise.
The chart shows the market has gone from a deep oversold as I highlighted back on Jun.25
and has now moved into short term overbought territory. With a new regime now starting out
to mold a "better" China, some volatility and economic sector vulnerability would be normal.
I am very keen on seeing what if any reform will come to the PBOC, China's central bank.
China is making previously restricted "A" shares available through new ETFs (See tick ASHR).
Let's let these babies season up for awhile before adding any to the potential shopping list.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!