Is China heading toward its version of the 1929 stock market crash?


LeapRate’s recent extensive investigation into the Chinese high net worth retail investment market concluded that astute investors with large portfolios prefer FX to any other asset class, and that across the entire nation are a series of introducing brokers and portfolio management companies which concentrate solely on FX.

There are several reasons for this, however one particular point is that Chinese investors unanimously have no interest in investing in the stock of large Chinese corporations which is listed on Shanghai’s exchanges.

One particular investor which LeapRate spoke to explained that Chinese investors want to be able to be masters of their own destiny and actually have the ability to influence their return on investment.

“It is not interesting to Chinese investors to buy stock in companies such as Baidu or Alibaba, both giant successful domestic market internet companies” said the investor. “This is because Chinese investors have no influence over the values of the stocks, or the management and operations of the stock exchanges or companies.”

This particular investor, an astute, young Shanghai-based FX trader with a portfolio of over $60 million, fired straight from the hip “Chinese investors do not want legacy investments where they can put their cash in and sit and watch the market. They want to create their own possibilities and influence the values of the stock that they buy, by being an instrumental part of that business and buying in and driving it forward.”

He, along with a series of high net worth portfolio managers in China with whom LeapRate had candid discussions, all displayed a preference for FX over any other asset class, and indeed the wealth management companies with above $200 million under management concentrate almost solely on FX.

The government control of all of China’s large corporations and of the two main stock exchanges, as well as its domestic market limitation, differentiate China’s stock market from that of any other major economy, and the government can create its own environment with absolutely no influence from the outside, and free from consultants, lawyers or the dynamics of a free, market-led structure.

Six month ban on sale of stock

Therefore, as this week’s stock market collapse continues to unfold, China has now banned major shareholders from selling their stakes in companies for the next six months, representing a form of capital control on stocks.

Those with FX portfolios are trading a liquid, free asset, and are totally unaffected, but those saddled with large shareholdings in companies will be unable to realize their assets for six months, by which time the value may have been affected tremendously by government intervention.

It is against the Chinese Communist Party’s ethos to allow cross-border transactions and the government, whilst having created a fantastic environment for Chinese businesses to succeed, retains its disdain for foreign investors.

Therefore the prohibition of sale of shares also applies to foreign investors who hold stakes in Shanghai or Shenzhen-listed companies, although most of their holdings are below 5%.

IG Markets strategist Evan Lucas today stated “The steel price in China is now cheaper per tonne than cabbage.” China’s stock markets opened down again Thursday morning before making up some ground. Shanghai Composite Index fell more than 3% in the first half hour of trading before reversing course and rising 1.4%, while the Shenzhen Component Index opened down just over 1%.

Asian equities also extended losses as concerns over China’s market turmoil spread, while the safe-haven yen shot to a seven-week high as global risk appetite ebbed.

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Economic analysts and reporters are beginning to draw comparisons between Wall Street in 1929 and Shanghai and Shenzhen today. The Telegraph’s Jeremy Warner today provided his perspective: “The parallels with 1929 are, on the face of it, uncanny” wrote Mr. Warner.

“After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess” he concluded.

This may be a reasonable comparison on the face of it, however it is not prudent to compare a stock market crash in a free market economy with that of Communist China, as the two systems are completely different.

The corporate structure of China’s companies retains massive government interest and there is no corporation tax or income tax applied to any entity or individual in China. Instead, the government controls a percentage of all companies, and provides its direction accordingly without management consultancies or lawyers. Companies rely on government departments for these services, which are effectively provided free of charge.

As a result, the revenue which provides for every service, instead of individual and corporate taxation, is generated from the profit from companies which the government receives according to its mandatory part ownership of all companies.

Bearing this in mind, Chinese government officials are completely in charge of the entire dynamic, and Chinese investors are not exposed to debt or liability, however their individual will to eschew illiquid stocks remains, which can only remain a good thing for the FX industry wishing to conduct business in China.

Photograph: Andrew Saks-McLeod investigates the unanimous preference for FX among China’s high net worth traders and wealth managers

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Is China heading toward its version of the 1929 stock market crash?

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