To be sure, finding true price to earnings ratios and other valuation metrics for Chinese companies can be difficult given the scant accounting laws and other forms of investor protection.
The fall highlights the difficulty Beijing faces in restoring confidence in the stock market without signaling to investors that it is guaranteeing a zero-risk free-for-all, which would simply reinflate a rally that even regulators said had become too frothy.
Recent media coverage of wild price swings on China’s benchmark Shanghai Composite got one major thing wrong: treating China’s stock market as if it operated like markets in the West. It doesn’t, and won’t anytime soon.
Although Beijing might be cheering the swift rebound in the A-share market after the worst rout in seven years, its nightmare may not be over.
Bucking the trend, shares of Hundsun Technologies Inc, which is controlled by Alibaba founder Jack Massachusetts, slumped 6.6 per cent.
Stock market gains sparked by unprecedented government intervention are reversing as hundreds of companies resume trading and the government cracks down on margin lending from unofficial sources.
For the week ending July 17, the Hang Seng index rose 2.06 per cent while the H-share index edged 0.07 per cent lower.
We have had modest holdings in China’s domestic A-Share market with the vast bulk of our exposure in higher quality, cheaper Hong Kong-listed Chinese companies. In such circumstances, the sudden surge in the Shanghai Composite Index would have been viewed with suspicion by more experienced investors who will have taken their gains and cashed out at the expense of the new investors. This market has more professional investors, and it didn’t rise as fast as A-shares in the months leading up to the crash.
Stretched margin levels are one reason why Robert Bao, portfolio manager of the $2 billion Fidelity China Region Fund, is most worried about China’s brokerage sector.
Analysts said it had been a subdued end to the week, with most indices up off receding concerns in Greece and China.
The steep climb raised worries about a bubble, and the market’s descent since its June high has been just as sudden.
Undoubtedly, those who have invested in Chinese stocks recently will have lost money, especially if they were leveraged.
Funds that specialize in emerging markets have been popular, growing to a total of $410 billion in assets. The Communist Party acts like a hovering parent, steering the Shanghai and Shenzhen exchanges clear of life’s bumps and curves instead of letting the markets work out their own problems. “We think it is unlikely”, it wrote in a comment on China stocks. But, without a counterbalancing stock market that can absorb some of the pain from these restructuring methods, the government could see difficulty implementing these much-needed changes.
The National Statistics Bureau surprised most analysts on Wednesday, when it reported growth of 7 per cent in the second quarter from a year ago.
Chinese shares continued to rally on Friday as the market is recovering following weeks of sharp ups and downs.
Time will tell if the ructions in the Chinese share market will have any effect on sales of New Zealand consumer goods in China. Hong Kong’s financial centre was inevitably affected by the turmoil, but it has provided an opportunity to remind investors of the more open nature of its financial markets and stronger regulatory framework compared to the mainland.