China Share Markets: Like A Powerful Dog On A Tenuous Lead

Take a picture of the market dear reader. It will last longer than staring at the spectacle that has become the Great Global Melt Up of 2007. One thing we’ve learned, however, is that a good party can last a lot longer than sober people expect.

The Shanghai composite rose 1% on Monday and closed about 4,000. In Shenzhen, shares did even better, closing at 1.4% to 12,269. The two biggest winners on the day were an odd couple; Shanxi-based Datong Coal closed up 10%, while Beijing-based Aerospace Hi-tech Holding Group closed up 9.97%.

Both are probably good businesses in the long-term. Coal (which we’ve written about indirectly in the newest issue of Australian Small-Cap Investigator) provides power and heat. China has recently, for the first time in its history, become a net importer of coal. Aeroplanes, moving China’s millions around the country, are capital intensive and key to a nation’s transportation network.

And frankly, both would probably have moved higher if Chinese regulators had not been forced to impose artificial limits on how fast shares can actually rise. A few months ago, officials limited the rise of  IPOs in the aftermarket, worried that shares tripling in value in one day would encourage speculation. Imagine that. This is what it’s come to in China. The market is rising so fast it has to be restrained like an eager and powerful dog on a long and tenuous lead.

Authorities were also forced to restrict actual public companies from reinvesting bank loans or the proceeds of an IPO right back into the stock market. When you think about it, it’s not a bad strategy though. Is there a surer way to make money these days?

Go public with the intention of using the funds raised to invest in the stock market. Pretty simple.  Isn’t this what the Blackstone group is doing, raising money in the public markets to invest money in public companies? More on this in a moment.

One more China note. The Chinese Security News reported that the market value of the country’s two big stock exchanges exceeded the value of Chinese savings for the first time ever. The People’s Daily reports that the “Combined market value of the two bourses in Shanghai and Shenzhen hit a record 17.43 trillion yuan (2.23 trillion U.S. dollars) on the previous trading day…The figure compares with the country’s savings deposits, which shrank by 167.4 billion yuan in April this year to 17.37 trillion yuan.

This is why the stock market is a giant wealth transfer mechanism, and not simply a savings account with a higher interest rate. It will undoubtedly make some people rich, especially the people who run the exchange or charge money on each trade. But when a country moves a majority of its national savings out of the banks and into the share markets, something important has happened.

True, a share market might better deploy the nation’s capital toward productive investment than the banking sector. We say “might” because we wouldn’t exactly describe China’s current share market as a ruthlessly efficient allocator of scarce capital. It’s a rip-roaring casino. And the nation’s savers can’t wait to get in.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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