When I first moved to Shanghai in 2004 I was told by a lot of old china hands that “Shanghai is not China”. That saying has been true for most of the 150 years that Shanghai has existed. She has always been Chinaâ€™s gateway to the rest of the World and was usually allowed to play by her own rules. The same can also be said about the Shanghai Stock Market, it too seems to play by its own set of rules, though these rules seem to be more about second guessing the intentions of the mandarins in Beijing.
When I first came to Shanghai the equity markets were in the doldrums after one of its typical boom bust cycles, the market had sat in a narrow trading range for many months, no economic news no matter how positive could seem to make the market move. The market had become weighed down by the overhang of millions of state owned shares. All most all the listed companies had at one time been a state owned entity. When they had gotten their initial listings they had issued freely tradable shares but had kept back the majority of shares in the governmentâ€™s hands. These shares were not tradable, but the government had started to make noises about freeing these shares to trade.
This made investors very reluctant to buy shares even in companies that were showing very good revenue and earnings growth. The thought of having a wall of previously state owned share hit the market kept investors away. It took a couple of years of effort by the government such as cancelling some state owned shares as well as giving additional shares to private investors to sort this out. This exercise just reinforced in the minds of investors that the performance of their investment portfolio rested on the whims of the mandarins in Beijing.
The Shanghai Stock Market is once again waiting for the mandarins. This time investors are waiting for the government to intervene to prop up a falling market. As the market began its long decline in November last year, the rumor had gone around that the government would ride to the markets rescue because this was the year of the Olympics and the government would want to avoid any unrest. Many grimly hung on to their stock position as the market began its long decent, believing that the government would intervene. The Olympics have almost over and they are still waiting. Very soon, perhaps during the closing ceremonies, it will dawn on them that there will be no rescue this time. This will be when the market finally accepts reality and will reach its bottom.
In Shanghai they play by their own rules, so do not expect a rally immediately after this happens, in all likelihood this market will sit range bound for sometime ignoring good economic news as it did in the past until the government changes the rules and sends it soaring again to unrealistic levels. Though this is the Main market of the Worldâ€™s second largest economy, it is still very unsophisticated. It is driven more by rumors of government interventions than it is by economic fundamentals.
Callum Roxburgh is a Wealth Manger based in Jakarta, Indonesia, who publishes a blog on Financial, Economic, and Investment News. You can see more of his articles and opinions at The Wealth Manager