Current Chinese Stock Market Obviously Overvalued
(This is part story, part article. For the article part, scroll down to the end)
Chinese Stocks Undervalued
A couple of years ago a fellow local English teacher took me out to dinner and we somehow happened upon the current sad state of the Chinese stock market. I pretty firmly said that since everybody was afraid of the market, and prices of companies were pretty depressed, that now wouldn’t be a bad time to buy. There could be better times to buy if prices fell further, but right now was a pretty good buying point.
It turns out that over the past two years (particularly the past year), the Chinese stock market has done incredibly well. So well, in fact, that it now seems overvalued.
About half a year ago I had a conversation with a friend of my girlfriend who was a fairly senior guy in a Shenzhen brokerage firm, and I tried to make the case that Chinese companies (read: stocks) as a class are not a great place to invest in at the moment, not only because they had already gone up quite a bit (about 50% from their lows from the conversation with my fellow teacher), but more essentially because a large majority of Chinese companies do value their shareholders’ interests highly enough.
There are many cases of public companies in China having their shareholder’s money embezzled, and a huge percentage of Chinese companies spend countless dollars on entertaining (such as ‘high class’ Kareokee bars), money that in many cases could be better put to use by reinvestment into the company. Suffice to say, until there is a huge cultural shift within Chinese companies to one of strongly looking after the interests of minority shareholders, Chinese companies as a class will not be the best place to put one’s money (at least for the long run).
Chinese Stocks a Great Investment
Then I got a message from this guy the other day pointing out how I was wrong and how Chinese stocks are a great investment. Maybe in the short run, yes, and maybe I was wrong when they were up only 50%, but now is definitely not the best time to buy Chinese stocks (especially from the mainland) based on a value oriented perspective. Unfortunately, my friend and coworker just threw all of his money into the market, “investing for the long term” as he put it to me, even after he had been wary of the earlier run up. Someone turning from bearish to bullish as the market continues to shoot up is not exactly the best of signs.
Of course, a gambling attitude pervades stock market ‘investing’ in China, and things that go up tend to keep going up. Until they go down. What makes the average public Chinese company worth more than twice what it was worth last year? Not much, really. And to be honest, had I been blessed with a higher salary two years ago while teaching English, I probably would have put a little bit of money into the Chinese stock market at the depressed state it was in, and hoped the teacher I talked to then did, and then restrained himself from throwing in more after prices have gone up this much.
It’s a shame one can’t buy any long term puts in the current market environment. It would be a hedge against things going bad for China and having to quickly leave (no matter how small such chances are), at the least, and a better hedge against the irrational exuberance taking place these days in the Chinese stock exchanges. The following article, translated from Chinese into English out of this week’s modern weekly, talks about the problems with the current Chinese stock market:
“It’s hard to predict when greed and the Chinese stock market will reach their highest points, but with A stocks in China more pricey than similar American stocks, the time is not too far off”
Facing the swift ascendancy of China’s A stock market, Morgan Stanley issued a serious warning. Morgan Stanley believes that since China is still in the midst of systematic financial reforms, one should not overvalue China’s stock market. Whether from a local market perspective or a global stock market perspective, China’s A stock market is currently overbought, and with liquidity becoming pretty much the only topic of discussion in the Chinese stock markets today, it might be time to rethink the value of China’s stocks.