Stock Markets Take A Dive In China

Published: Wed Feb 28 2018

Things seemed normal enough until the stock markets in China dropped suddenly. In Early February, the markets were down by some 10%. All of this happened in just the span of one week. This was a very notable decline and for many investors in China it was the sharpest fall in over two years.

Was this market drop unique to China? Not really since the US stock markets had suffered an even sharper decline and had, in some ways, infected the rest of the world markets. Still, for local Chinese market traders, a loss was a loss and they vented their displeasure on social media. The US received a fair share of the frustration but so did other entities including officials and regulators in China.

Apparently, the comments were noticed by Chinese officials and they acted promptly to try and infuse new confidence in the markets. Notably, many officials in China were encouraging the public to buy shares and to take advantage of the lower share prices. Larger investors were also being strongly encouraged to also carry out positive steps and purchase stocks. Those were the carrot side of the equation. Interestingly, the stick side came in the form of a strong warning against investors that might be tempted to sell stocks or issue short orders. Significantly, some 300 publicly traded companies in China suspended their shares from being traded. Effectively, those companies wanted to wait out the market storm that was ragging around them.

The combined efforts appeared to yield positive results. Over a few days, the stock markets in China regained some of their lost ground and were moving in the right direction once again. This was all very welcome news to both local and international investors.

Still, the entire episode brought back painful memories of an earlier event that had taken place in 2015. Back then there was another market crash and it was of such a magnitude that the government of China had to step in so as to avoid a total collapse. The efforts, at the time, were far reaching and coordinated.

So, can it be said that the 2018 market drop is similar to the 2015 crash? From the perspective of Bouchard Fintech, the answer is yes, in some ways, but different in others. The events of this year are more moderate than those of 2015. Additionally, share prices in 2015 were overpriced whereas in 2018 the consensus is that shares are being traded at a fair price.

Interestingly, China's has the ChiNext, which is roughly equivalent to NASDAQ. Like NASDAQ the ChiNext trades at much higher value than the companies that are represented, at least in terms of earnings. Still, the ChiNext of 2018 is far tamer than that of 2015.

The research from Bouchard Fintech found another interesting comparison. This one has to do with S&P 500 and its Chinese counterpart the CSI 300. Both Indexes trade at higher multiples than would be measured by earnings alone. And, the CSI 300 is actually much more reasonable in its valuations that the S&P 500.

Additionally, it is noteworthy that stocks in China can be traded on the Hong Kong stock exchanges as well. This dual trading has, in some ways, improved the position of Chinese publicly traded companies. Share prices reflect a more globally acceptable valuation. There is also a concerted effort to provide added access to the Chinese markets to outside investors. In that effort, it is interesting to see that shares of Chinese listed companies will be added to the MSCI index and therefore be accessible to global traders.

While regulations in China are still substantially higher than in other countries, they are being worked on and are being streamlined. The government activities and interventions of 2015 are far fewer in 2018.

Given the positive changes that have taken effect in the Chinese stock markets, it is reasonable to think that the markets in China are showing a measure of market savvy and market maturity. Those are welcome signs as the markets in China have migrated from being dominated by smaller investors to now being influenced by much larger investors and institutions. Over the last few decades the Chinese stock markets have gained in sophistication and can now rightly boast about having many highly-experienced traders and fund managers.

The above article was written by Bouchard Fintech.

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