To the uninitiated playing the stock market has always suffered the perception of being akin to gambling. We at the IC don’t view it that way of course – a sensibly managed equity portfolio can deliver steady returns over the years with easily manageable risk. But China is more than living up to its long-standing reputation as little more than a casino - perhaps Chinese investors should have stuck to the gambling halls of Macau, which are said to have been strangely empty as punters took to the markets instead. As reforming Chinese economist Wu Jinglian once said, “at least there are rules in a casino”.
In stark contrast to Western bourses retail investors account for 80 per cent of activity on China’s markets; many of them have borrowed to buy into the boom, and haven’t got a clue what they’re doing. The actions of its regulator, the China Securities and Regulatory Commission (CSRC), are also rather questionable – it’s pulling out all the stops to support a market which was overvalued on any normal measure, backstopping brokers and shares with government money, banning share sales and loosening rules on margin trading amongst other measures. The CSRC described the sell off as “irrational” – forgetting the irrational exuberance of the investors that drove it higher in the first place. And there is nothing rational about creating the largest stock overhang the world has ever seen.
Some commentators have argued that China’s stock market woes won’t harm its economy - but the level of government interventions suggests it thinks otherwise. Big losses could put the brake on the country’s big plans to shift to a consumer-led economy, and hurt the prospects of Western companies eyeing its markets. As Mark Robinson writes in his commodities column this week, London’s miners have already taken a savaging as a result of the latest grim news from China. UK investors face more direct fallout too – Fidelity China Special Situations, for example, is a popular holding among those looking for Chinese exposure and has fallen heavily this week. It’s a well-managed trust which we’ve liked for some time, but I wouldn’t blame investors for having second thoughts about re-evaluating their holding – no matter how well run it is, the same cannot be said of the markets it invests in. And while, as in Europe, there will be diamonds to discover in the wreckage of China’s market collapse, without major reform of ‘the casino’ it’s a gamble not worth taking.
