fund manager and author of
A Bull in China
(a pop-investing book directing American retail investorshow to buy Chinese stocks) in 2007 advised
:Of course, not all analysts were similarly bullish. RateFinancials, a private accounting firm whichanalyzes and rates financial statements for publically listed companies, investigated the SEC filings forthe ten largest Chinese firms listed on the New York Stock Exchange. They found that the Chinese firmsall had “low quality earnings, aggressive accounting, low bad debt allowance, and insufficient cashflow…”
. The vice-chairman of the China Securities and Regulatory Commission (China’s primaryregulatory body overseeing securities markets, hereafter CSRC) warned Chinese investors of the “risksinvesting in the stock market”, urging that “[Chinese Investors] should think carefully before entering”
To this end, the stock market in China has often been characterized as a “policy driven stockmarket”. While it is difficult to make an authoritative definition of what exactly a policy-driven stockmarket is, Professor Sebastian Heilmann characterizes such a market as “a market in which politicalcalculations, policy missions, and administrative interference are more important than the dynamics of market competition for determining price fluctuations”.Almost predictably, in late 2007 the soaring equity markets came back down to earth - the ShanghaiStock Exchange Composite Index lost almost two thirds of its value since the top in October. And whilespeculative euphoria is certainly not unique to China, the rapid rise and subsequent crash exposed manyof the misperceptions that foreign investors have concerning China’s bourses. This paper will argue thatthe Chinese stock market has entirely different fundamentals than much of the world’s equity markets.In most countries (even those with similarly underdeveloped capital markets), investing in stocks givesthe investor adequate exposure to the locality’s economic growth. In China, however, the value of equities can be and often are fundamentally detached from the underlying economic reality. To thecasual observer, it appears that many investors rushed to participate in China’s stock market boomwithout a firm understanding of exactly what the assets they purchased actually represented.
. It is precisely this political dimension that wasthe origin of China’s rapid and precipitous rise in stock prices as well as the basis for the subsequent fall.
Rogers, Jim. Jim Rogers Continues to View China as the World’s Best Long-Term Profit Play Keith Fitzgerald. 20August 2007.
RateFinancials. Government Controlled Entities Masquerading as Independent Public Companies. FinancialSurvey. New York: RateFinancials, 2007.
Dong, Zhixin. "Regulator Warns on Stock Market Risk." China Daily 29 April 2007.
Heilmann, Sebastian. "The Chinese Stock Market: Pitfalls of a Policy-driven Market." China Analysis (2002)
I'm not selling my Chinese shares. As I said, I bought more of them last week. [I would sell only if] themarket tripled again in 2008. The Renminbi is going to be one of the strongest currencies in years tocome … if you invest in equities, think about China.