A Repost
2007/10/10 21:58:41
Sorry, I've been extremely busy these past few days. Got back too late today to write a post. I happened to come across a new article that responds to views similar to those in this ID's earlier post ""The Unbearable Mission of the 'Hong Kong Stock Connect'"," so I'm reposting it here. This idea of significantly increasing blue-chip circulation will probably gradually gain momentum and eventually become part of policy.
Hua Sheng: Warning of A-Share Bloatedness Above 5000 Points
October 10, 2007
Hua Sheng states that although he has been pouring cold water recently, his intention is to hope for a sustainably developing capital market.
"I am not a bear. We pour cold water and issue various warnings because we want to avoid a situation where bubble accumulation leads to a burst."
When the Shanghai Composite Index stood above 5000 points and investors were cheering, a somewhat "discordant" article—"The Bloatedness and Warning of Market Capitalization Far Exceeding GDP"—was published in China Business News and quickly became the talk of the town. The author of this article is Hua Sheng, president of Beijing Jinghua Overseas Chinese University.
On July 1, 2001, when the market was approaching the 2245 peak, Hua Sheng published an article titled "Signals of an Approaching Bear Market," foreseeing the coming bear market. On May 10, 2005, when the index was about to drop to near 1000 points, he published another article, "Signals of a Market Turning Point." Last June, he specifically wrote "Welcoming the New Era of the Securities Market," stating that China's stock market capitalization would increase tenfold.
The rapidly growing market capitalization and some abnormal phenomena in the stock market this year have begun to worry this rational scholar. Hua Sheng has now been jokingly dubbed the "Commander of the Bears" by the market, and his recent articles have all been "pouring cold water" on the market.
Recently, in a joint interview with China Business News Channel's "Meeting Financial Leaders" program and China Business News, Hua Sheng elaborated on his views of the current stock market.
Bloatedness and Warning
Just after the 2007 May Day holiday, Hua Sheng suddenly shifted from a very optimistic role to a market bear, writing two articles—with rather attention-grabbing titles. One was called "Signals of an Overheating Market," and the other was "The Bloatedness and Warning of Market Capitalization Far Exceeding GDP."
To most people, the increase in China's asset securitization should be a good thing. Yet now Hua Sheng says the market cap has become "bloated"—is this alarmism?
"I never know where the market's high point or low point will be. But as a serious researcher, an economist, one should have one's own judgment and analysis of market trends and patterns," Hua Sheng said. The reason he spoke so seriously was that speculation was running rampant at the time, including on junk stocks. "The speculative atmosphere at that time was even more intense than what we see now above 5000 points. I believed this phenomenon was abnormal."
Thanks to the government's timely series of policy measures, after "May 30th," the market saw a major correction, and the rampant speculation in junk stocks was significantly curtailed.
"Although many junk stocks are still far below their previous peaks, the momentum of further market cap expansion hasn't stopped—it's actually accelerating," Hua Sheng said. "My research finds that China's stock market capitalization hasn't just marginally exceeded GDP—listed company market cap is already 150% of GDP."
"Why? Because we cannot ignore those domestic companies listed in Hong Kong, as well as in New York, Singapore, London, and elsewhere. They are also domestic companies. Especially as they return to list domestically, this market cap naturally gets added in. Even before they return, they still exist—they're still our domestic companies," Hua Sheng said.
According to global standards, developing countries typically have securities market capitalization at 20-30% of GDP, moderately developed countries around 50-60%, and developed countries around 90-100%.
"From a micro-level indicator perspective, our stock market's P/E ratio is already the world's highest. Our economic growth is fast, but we're not the only fast-growing economy. India is also growing fast, and Russia's economy has been growing rapidly these years too, yet they don't have such high P/E ratios. Another indicator, the price-to-book ratio—we're also number one in the world," Hua Sheng said—this is indeed something to be vigilant about.
Significantly Increase Tradable Market Cap
After Hua Sheng's articles were published through the media, they had tremendous impact and also drew some questioning voices. First, some questioned whether comparing China's situation to Japan's was appropriate, since Japan's macroeconomic growth was already very low during its bubble period, whereas China's economic growth is still very high.
The second point is that due to China's market supply-demand structure, market cap has a degree of distortion. For instance, the market caps of some large blue chips were inflated by capital flows when most shares were still non-tradable.
"Regarding the first point, we didn't just compare with Japan—countries like Korea also went through similar situations," Hua Sheng said. We don't want to repeat that path, which is why we issue early warnings.
"As for the second question, I think it actually supports my viewpoint. What I'm talking about is 'bloatedness.' What does 'bloatedness' mean? It's because you've only listed a small portion—therefore your total market cap is exaggerated. So the second viewpoint shares common ground with mine. It's just that different angles lead to seemingly different conclusions. Precisely because the proportion of our listed tradable shares is too small, the overall market value is inflated. Inflated values mean that tradable share prices are too high. This brings a series of hazards."
"What especially needs to be mentioned is that the listing proportion of our large blue-chip stocks is too low. This is very dangerous for the upcoming stock index futures. Think about it—futures investment is mainly linked to large blue-chip stocks. If large blue chips all have small float, and a few hundred billion in market cap can move a market worth trillions—such an index is hardly seen anywhere in the world, if at all. The danger is great," Hua Sheng specifically cautioned.
"What policy conclusion does this lead to? To remove the 'bloat,' we should significantly increase tradable market cap," Hua Sheng said.
Although in Hua Sheng's view, the current stock market has already shown some abnormal 'bloatedness,' he doesn't favor the government suddenly crushing the market. Instead, he hopes for a more gradual approach.
"On this point, I share common ground with the bulls. We all attach great importance to the capital market's significance for the nation, especially for a rising great power like ours. So even though I've been pouring a lot of cold water recently, our intention is to hope for a sustainably developing capital market," Hua Sheng said.
"Our goal is absolutely not to attack it. So I've said I don't want the government to use overly drastic administrative or economic measures to suppress the market. Then why should the government still play a role? Our market already has the government playing an important role. For instance, how much supply to release, or whether a company lists at 2% or 20% float—these are already government decisions. It was never a market-driven process. We hope the government uses methods that are more in line with international norms, more suited to market economy development, and less disruptive to the market."
"For example, I think large blue-chip stocks should have a higher listing proportion—at minimum meeting the Securities Law requirement of 10%. Having a substantial public float is very beneficial for improving corporate governance as we discussed," Hua Sheng said.
Supply-Demand Imbalance
Although more and more experts and viewpoints support the idea that the market has overheated, neither the government's regulatory measures nor the warnings from various experts have been able to restrain investor enthusiasm.
Hua Sheng believes there are mainly two reasons. First, the measures the government has launched this year, aside from the stamp duty, were not directed at the stock market.
Second, from the securities market itself, this year due to changes in demand dynamics, the wealth effect of the bull market, and negative real deposit rates, massive amounts of capital have flooded into the market. Demand has undergone enormous changes, but supply hasn't changed much. For some time, several hundred billion yuan has been flowing into the market each month, while the capital needed for stock supply has been only a few tens of billions.
"In any market, when supply falls short of demand, prices rise. And our current securities market price increase, since May—including securities industry professionals—everyone has analyzed it. It's clear that too much money is chasing limited stocks. When supply doesn't increase or increases only very marginally, price rises are hard to avoid," Hua Sheng said. "Starting in September, the supply of large-cap stocks has begun to increase, and market supply-demand dynamics have immediately started to shift. But the increase in supply has considerable volatility, and expectations are unclear. The current issue is that large blue-chip stocks don't need to be listed quickly or urgently, but should be listed one by one as they mature. However, once listed, they should have at least 10-20% in public float, making the designation of 'public company' truly deserved."
"Why is the listing proportion and quality more important than the number of companies? Look at the A-H share price gap. Some say different markets should have different prices. But the main reason is supply-demand. The average H-share float is about 7 times that of A-shares. If A-shares and H-shares had similar float sizes, there wouldn't be much of a price gap. Currently, the float of large A-share listed companies is artificially kept very low—many at only 2-point-something percent—forcing investors to buy at high prices. The so-called 'bloatedness' is artificially controlling the listing proportion, causing inflated stock prices."
"Since around April or May this year, I haven't proactively recommended anyone enter the market, but I also wouldn't casually advise people to leave. Because in any market, there are always investment opportunities, even during bubbles—there are still excellent stocks," Hua Sheng said. I can only say the current securities market carries significant risk, and every investor must have the ability to bear risk on their own.
□ @Hua Sheng China Business News