INVESTING IN CHINESE STOCKS? BEWARE!
By Ruma Dubey
The Chinese markets have never been so turbulent. The persistent free fall of the markets there, despite the Government interventions has truly spooked the world. A full-blown crash in Chinese stock markets, where 85% of the traders are retail investors, could bring down the world’s second largest economy. Commodity prices have also slumped to previous lows.
Presently, half of companies listed on the Shanghai and Shenzhen exchanges have asked for voluntary suspension of trading. Some 28 IPOs have suspended their plans.
Weird things to note currently on the Chinese bourses – though half of the Chinese stocks are suspended, the investors are happy as they feel it is a harbinger of reforms coming in. Strangely enough, Govt owned bank stocks, even in this routed market are hitting new highs – indicating that the Govt is buying and propping it up. Like us, the people in China are blaming the current sell off on FIIs but that is so far from the truth - they currently have limited access to Chinese markets, and own less than 2% of the market cap.
Thus currently, the Chinese problem looks larger than Greece. And this brings us to one big question – how do the Chinese exchanges work and despite these issues, how come FIIs flock in droves? If one looks at the almost rudimentary and very controlled way of trading, it seems preposterous that people even compared India and China when it comes to trading.
Yet, there is this constant talk of India and China. Any time, there is any data or story on growth, the two are inevitably compared; to a point of obsession in India. But both the countries are as different as oranges and apples. Right from the culture, food, way of life, infrastructure, governance; everything is different. And frankly, the Chinese economy is so far ahead of India, that it really makes no sense to compare the two.
Currently, the big India v/s China debate is whether FIIs will invest more in China after rate hikes in USA; whether India will see flight of money to China. Well, that might really be the case. If it were based purely on the economy also, this would have really made sense as the country is currently a real slowdown. But sometimes, we look at how China treats the traders/investors, with no shred of governance or transparency, one cannot help but wonder why the FIIs go there at all?
Take the recent case of this company, Hanergy Thin Film Power. Before that, a small background – till November last year, Hong Kong was the gateway into China and one could invest in the Chinese stocks, which got listed via an IPO on the Hang Sang. But in November’14, a new exchange opened in Hong Kong - Shanghai-Hong Kong Stock Connect, which was partnership of China’s Shanghai Exchange and Hang Sang. Here, even the huge Chinese companies could trade and thus FIIs gained access to invest into the public sector companies of China.
So now coming back to Hanergy Thin Film Power. This renewable energy company was listed on the Shanghai-Hong Kong Stock Connect. A few months ago, this stock was Hong Kong’s biggest in terms of market cap and then all of a sudden, on 20th May’15, the trading in the stock was suspended. Before suspension, it had started falling like there was no end, crashing over 47% within minutes and the company itself had requested a trading halt. And that’s that. Since then investors, who had thought they were sitting on a gold mine are now left holding on to a stock whose future and present they do not know. Like SEBI, they too have a regulator – Securities and Exchange Commission and the only statement coming forth from them was that they were investigating the company. Since then there is complete silence on the stock, suspended but with a market cap of US$21 billion, basically as worthless as a chit of paper today. Currently off-market, private deals are being struck and this is at a discount of almost 87% to the last traded price before suspension.
Can we ever imagine such a thing happening on the Indian bourses? We have our circuit filters in place and SEBI does it job pretty well. The very same FIIs who constantly blame us for red tape and corruption, how do they deal with such issues when investing in Chinese stocks? Where is all that talk about transparency and governance gone?
And here registered FIIs can directly buy and sell stocks. But in China – foreigners can buy shares in Shanghai by first going through a broker in Hong Kong who then must go through the Hong Kong Stock Exchange and will thus gain access to Shanghai stocks. And there is a daily limit of $2.1 billion for investment into Shanghai-listed shares, with an overall cap of $49 billion. The overall amount mainland Chinese investors can invest in Hong Kong stocks is $40.8 billion, capped at $1.7 billion a day. That’s not all, investors have to place their order to buy or sell one day in advance thus limiting their ability to react quickly to market-moving events.
So how come FIIs cannot invest directly in mainland China - on the exchanges at Shanghai and Shenzhen? Well, they can but again with conditions. There are two categories of shares – ‘A’ shares which can is only for Chinese nationals and only in renminbi. Some Qualified Foreign Institution Investors can trade but that also is restricted to a quota. Then there are ‘B’ shares, which are open for all and can be traded in US dollar or Hong Kong dollars. B shares are as the name suggests – very poor quality companies and thin trades. Thus FIIs prefer the new Shanghai -Hong Kong Connect, which as we saw earlier, is riddled with its own set of issues.
Well, having said all this, does it seem like a wonder then that the FIIs, who crib about the smallest of issues in India, rush in droves to China? And maybe that is the crux of the issue – what is the lure of China? Maybe the sheer size of the country and economy, the opportunity to make money, in whatever way possible. Even though there is no corporate governance and transparency is a joke?
FIIs are not faithful husbands – ‘till death do us apart’ types. They are rich Casanovas and whichever market is more attractive, they will go and park themselves there. It is only Ram Leela and no Amar Prem. So does India look attractive today?