Foreign Investors Pulling out of Chinese Stock Market
The word on the streets in China is that foreign institutional investors have all but pulled out of China stocks. At least that is what my friend has repeatedly told me in recent days. The Wall Street Journal today also has an article that touches upon this, saying:
International fund managers lowered their exposure to China in May, moving to a neutral position from slightly overweight, while the country’s stock markets continued their surges to records (…) Although fund managers remain largely optimistic about continued growth in the Chinese economy, they are staying cautious on the country’s stock markets in the near term. Earnings from Chinese companies were stronger than expected in 2006, and many companies forecast bright outlooks, paving the way to market gains.
Still, all but the most bullish fund managers expect some kind of bubble bust to occur in the Chinese markets.
Even the guards are betting on China’s market
Sounds like the fund managers are becoming quite negative. Of course, to pretty much anyone outside of China, it is obvious that the stock market bubble here has reached epic proportions. Even common security guards, who make about US$100 per month here in Shanghai (and even less elsewhere in China), are jumping into the market, glued to financial TV in their guard station to see what happens next in the Chinese stock market.
Shanghai B Shares Index Rocket Trajectory
Since foreign investors can only invest in B shares in the mainland market (which represents a much smaller slice of China’s total stock market capitalization than A shares), this is the only market you should be looking at if you are considering investing in China. Let’s look at the performance of the Shanghai B shares Index:
China stock index for foreign investors up more than 600%
As you can see from the first graph (both of the graphs are from the Shanghai Stock Exchange website), the most recent low point was 51.40 in July of 2005. From the graph below you can see that the most recent high, two days ago before the jarring 6.5% drop, was about 381.30.
In just under two years the Shanghai B Index has gone up 642% from its low point to its recent high. That is absolutely insane. Keep in mind that this is a measure of the index. Some stocks inside of it have obviously gone up way more than this.
China stocks have a long way to fall
It looks like it’s going to be a while before I would ever consider putting any of my money into China’s stock markets (these things tend to drop quickly whenever the drop comes, and then slide down slowly from there), and that sometime in the not too distant future, stocks in China will fall dramatically. But next time around, when everyone in China thinks stocks are a ‘can’t win’ proposition and have already fallen back down to their long run trend, and people are crying out loud about how bad of an investment China stocks are, I just might start buying.