Why China’s stocks will fall more – the WTO column

Shanghai Stock Exchange

(Also at Chinabiz and BNN)
It is spring again and just like the little birds spreading their wings, bankers and other securities specialists, both foreign and domestic, hit the media with their new predictions on the future of the stock markets. “The bottom has been reached,” they always say without blinking an eye. It gives me a good mood, just like the little birds, since you know that at least some things in this world never change.
Of course they have been wrong for the past four year and they will be for the next four, but who blames those little hungry creatures? They are hungry, they need to eat to, they cry for attention, they cannot admit there are not enough worms around to feed all those investment bankers.

Since the summer of 2001 shares on both the Shenzhen and Shanghai stock exchanges have been falling. Sometimes they fell fast, sometimes not that fast, but the general direction was south. On individual stocks some people did make some money, but only when you were or very smart or a crook and preferably both of them at the same time. There were two main reasons for this very stable direction the share prices took.
First, they were hugely over inflated. Because of the enthusiasm to buy stocks in the first decade of the stock’s existence, there was no relation between the price of stocks in China and their real value.
Now, that also happens outside China and is euphemistically called a “technical correction” by experts who have to explain an earlier too optimistic approach of the market. Now, why is taking the “technical correction” in China already four years?
What triggered off the dramatic change was the suggestion by the financial authorities back in 2001 that they were looking for ways to bring the so-called non-tradable state-owned shares to the stock markets. About two third of the shares of listed companies is held by government departments. The idea was to finance the empty coffers of the social security system in that way.
That implied a tripling of the existing liquidity of the stock markets and since then investors have been running for their money. And the plan to refund the social security funds got into problems, since the value of the state-assets dwindled with each new rumor.

Both issues have not been dealt with and have been impeding the stock markets greatly. According to recent count at Chinese media, the country has now over one thousands plans to deal with the dilemma. More important, after letting this wound fester for four year, Chinese media suggest now that in May the first experiment with four or five companies, floating their state-owned shares, might be taken. Getting it over with is probably the only possible way to get China’s stock markets in a better condition in the long run, although the coming years might be hard, very hard.
Professor Xia Baisan of the management school of Fudan university said in the Financial News: “I’m not optimistic about any coming plan, it may pull the market down in geneal, although the stocks picked for the test may rise. No matter what plan it adopts, the stocks must be sold. There is no actual benefit for investors.” The investors should prepare for the last, final run out of the markets.

Books on China's stock markets