Great Fall part 2 - Confusion reigns as stocks rout starts all over again
Days like yesterday reassure Tony Hann he was right to avoid stocks in mainland China.
The severity of an 8.5pc drop in the Shanghai Composite Index is bad enough, but what irks him the most is not knowing why it fell so much. In a market where unprecedented intervention has made government money one of the biggest drivers of share prices, authorities aren't transparent enough for investors to make informed decisions, said Mr Hann, who runs emerging markets at Blackfriars Asset Management.
Yesterday's plunge followed a government rescue package that had helped drive a 16pc rally since July 8. That support appeared to vanish without warning, leaving analysts guessing whether authorities shifted their policy stance or had been overwhelmed by a flood of sell orders. Foreign money managers didn't stick around to find out: they sold holdings of Shanghai shares for the 13th time in 16 days. Investors "are concerned and lost", said Alex Wong, a Hong Kong-based director at Ample Capital. "China's market is distorted, so you can't sell short very confidently and you can't buy up very confidently either."
Signs of government support evident in recent weeks went missing yesterday. PetroChina, a favourite of state-linked rescue funds, sank 9.6pc. If state-run funds withdrew support to test the market, the resulting retreat may prompt the government to step back in immediately, said Mr Hann. On the other hand, if policy makers let the market play a bigger role, shares may have further to fall, he said.
"It is impossible to say at this stage," said Mr Hann, who has exposure to China through Hong Kong's exchange. Foreign investors have unloaded about $7.6b of Shanghai shares through the city's Hong Kong exchange link since July 6.
For Ken Chen, a Shanghai-based analyst at KGI Securities, the more likely explanation for yesterday's tumble is that the government is struggling to prop up overvalued shares. At 66, the median trailing price-to-earnings ratio on mainland bourses is higher than in any of the world's 10 largest markets. "It's hard to start a new up move after a bubble bursts," said Mr Chen. "I don't think they are able to prevent it falling." (Bloomberg)