The comment of Chinese Financial market
China has two major stock indices: Shanghai Composite Index and Shenzhen Composite Index. They are like the S&P 500 and Dow Jones Industrial Average which can show the performance of Chinese stock market.
First of all, let’s understand several features about Chinese stock market. In my opinion, this market is more irrational than American stock markets. The reason is that this is a young market which lasts for less than 40 years. We can imagine that there are many pitfalls for this developing market. Secondly, Chinese market doesn’t have enough derivatives to trade. For example, there is no option market in China and you cannot find any other derivatives in China except futures. And the second feature can be a big problem for investors because when stock market starts to become unstable, there is no derivatives to hedge your position. The best way is selling all the stocks. Thirdly, the Chinese government has restrictions on foreigners to invest in Chinese financial markets. You may find some problems when you want to open a stock account in Chinese local broker companies. But foreigners still can find a way to invest in Chinese market directly. Fourthly, there are several kinds of participants in Chinese stock market, such as government, stated-own business, common people, financial organizations and companies and foreign investors. Among them, government owns stated-own corporations and influences market greatly. Stated-owned corporations count in stock market because all stated-owned corporations are giants and significant to their industries in China. Foreign investors and common individual investors only occupy a small part of the market.
The situation of Chinese stock market
After several crashes from June 2015, Shanghai Composite Index decreased from 5178 to 3096. We can see it from the graph:
The volume shrank more than a half compared to that in June 2015. One year ago, people eagerly put their money into market because at that period, everyone could make money no matter what people bought. But right now, that is not the case anymore. The bubble burst and people calmed down. Now they try to find a chance to escape from market. That is attitude from individual investors.
Now, the GDP Annual Growth rate in China decreased to 6.5%. The government wants to spur economy because the data says China cannot develop as fast as it used to be. One method that government is doing is letting more companies issue IPO to gain funds. Now more than 600 companies wait to issue their IPO. At the same time, government encourages companies to collect funds in stock markets and issues many policies to loosen IPO requirements. To put it shortly, government encourages IPO in order to have a higher growth rate in GDP.
Next let’s check the foreign investors’ attitudes. Majority of foreign investors in Chinese stock market are financial corporations, such as UBS AG, JP Morgan and Citi group. They prefer the stated-owned corporations and Chinese Baijiu industries in Chinese market to small caps or high-tech companies. I think that the reason is that those stated owned corporations have a well-paid dividend and are backed by government. Moreover, American has better small caps and high-tech companies.
The last one is financial organizations and companies. Because the majority of Chinese financial corporations are stated-owned, they will follow government’s policies and instructions. If we can understand government’s will, we can easily predict those financial companies’ actions.
The Envision of market
For now the market is steady and it is in Ice age. In the short term, those indices will not go up or go down. The best way to make money is to pick up the potential individual stock. The reason that market is frozen is that common people want to escape from stock markets at a fair price but government wants to finance companies in order to maintain the growth rate of GDP. This dilemma makes stock market frozen. The proof is that although government issues many positive policies to support stock markets, people still have no interest and keep transaction volume low. And as far as I am concerned, this situation will last for a long time.
The most profitable opportunity in Chinese stock market now is IPO. A company’s stock price, on its debut in market, will rise 44% in the first day. Because of daily fluctuation limit, 10% fluctuation at most in the next trading days, in next several days, this company’s stock price will increase 10% per day. I am pretty sure that if you can win a bid for IPO, you will get greater than 100% return rate. The method to decide who win the bid for IPO is like a free lottery. If you win a bid, you definitely make a profit. If you do not win a bid, you will lose nothing. It is like an arbitrage. But it has drawbacks. All the investors in China know this method and all investors want to win a bid for IPO. Thus for every individual investor, the chance to win a bid is tiny.
Another opportunity is special treatment stocks (ST). Special treatment stocks are the companies that lost money for three years. If we grade them, they will have a grade below BB. Now it is the time for companies to prepare to show their balance sheets. Some special treatment stocks may made profits in this year and get rid of the name special treatment or ST. Investors will have a wonderful expectation on those companies and would like to buy their stocks. Those lucky companies’ stock prices will rocket to sky. Now we should do some researches about those potential special treatment companies and buy their shares as soon as possible. When their balance sheets go public, we can know whether those companies make profits and decide whether to keep or dump those stocks.
The third opportunity is the companies that behave well, pay well-dividends and split their shares. Chinese like the companies that split their shares very much. That strange fancy is from a weird idea that splitting shares is a sign of potential. We can pick up some potential companies, buy their stocks and keep them until their balance sheets go public.
Comment of GXC
Here is the graph for GXC from June 2015. We can compare this graph to Shanghai Composite Index above.
Generally, GXC follows the similar pattern to Shanghai Composite Index, which means that GXC reflects the performance of Chinese stocks market. But this also reflects that GXC only invests the large companies in China. From the website, we can find that GXC puts money in Tecent, Alibaba, China Construction Bank Corp, Bank of China Ltd and so on. They are large corporations in China.
But here I want to point out that the combination of EXC is from several different stock markets. For example, Bank of China Ltd H is from Hong Kong market and Alibaba Group is in US market. And here is the problem. Bank of China Ltd is listed both in Hong Kong and China main land. The stock prices in those two markets do not behave in the same way. For example, they have different prices and pay the different dividends.
What I want to comment is that GXC reflects the behaviors of Chinese large corporations. But GXC’s choices of stocks don’t represent the performance of Chinese stock markets because the majority of those stocks are not listed in Chinese mainland stock markets.