CHINESE INVESTORS - YOU CAN NEVER STRAIGHTEN A DOG'S TAIL!
By Ruma Dubey
China announced its Q3 GDP data yesterday and this was greeted with a mixed, don’t-know-exactly-how-to-react kind of reaction. Its GDP showed the slowest growth for a quarter since March 2009, yet, at 6.9% (YoY), it was much better than what majority of analysts around the world had expected. So the verdict – yes, growth is slow but not bad as what most of us expected.
This was good enough for most of the Chinese. There are some 90 million individual Chinese investors and they together have been pumping up two major indices – the ChiNext Composite Index and Shenzhen Index. A day or two before the GDP data was to be announced, ChiNext saw some 5 billion shares being traded at 90 times profit, more than five times the valuation multiple for the Shanghai Composite Index.
ChiNext is China’s Nasdaq, with mainly tech firms listed and its listing norms less stringent than those of Main and SME Boards of the Shenzhen Stock Exchange. This is more like a smallcap index. Shenzhen Composite Index is midcap and it has subsidiaries of companies in which the Chinese government maintains controlling interest. Here too, the dominance is of technology based stocks. And traders have once again borrowed money to invest in Shenzhen shares. Shanghai, the “main” index remains muted.
So this divergence within exchanges is itself very funny – two are bullish while one is tepid. In India also we have two major bourses and usually, as it is seen world over, these indices move in tandem not divergent.
Thus this divergence in China can be explained by only fact – the short memory of Chinese traders and the perennial greed to make quick money. These traders have convinced themselves that given the poor macro indicators, the Chinese Govt is sure to roll out a stimulus package soon and they have pinned all their hopes on one sector getting all the largesse – technology.
As such, the Chinese President has boosted spending in the IT sector to help bolster the faltering economy. And earlier during the year, there was an “Internet Plus” program which was aimed to link web companies with manufacturers. There are also rumours of FIIs being given access to Shenzen’s stock market with linkage through Hong Kong, like Hang Sang.
This probably explains the reason why the current fancy for technology stocks. Another fact which emerges is that this batch of traders prefers small stocks which they feel are easier to flip for small gains. And this brings us to the crux of this story – traders all around the world suffer from amnesia.
The Chinese individual traders were some of the biggest losers a few months ago when the Chinese market crashed big time. It in fact led many to commit suicide. Yet, today, so many have returned back in droves, once again on the hope that things will get better and they will make a quick buck. So doesn’t greed impede one’s ability to think logically?
Obviously, these traders have not learnt lessons from the earlier crash or rather, did not lose as much which is why they have the confidence today to borrow and invest? Or is it an act of desperation?
The fact remains that the Chinese economy is not going to grow faster any time soon. This transition of the country – from being a manufacturing hub to now being more service oriented and retailer will shake up the world.
The bottomline – Q3 GDP were bad and no estimations can refute that! And Chinese traders? Well, that’s what we can call either foolhardiness as its best or die-hard optimism.