Chinese A-shares on a roller coaster

By Karine Hirn, Partner and Senior Advisor at East Capital

Far away from Europe and the Greek drama, the Chinese A-shares market went through a massive correction during recent weeks, sweeping away in value the equivalent of three Greek GDPs. The authorities came to rescue and as we speak the market seems to have stabilized. So what are the implications for global markets and how do we look upon China now and the potential of its market?

To set the stage right, most overseas investors currently invest in China through Hong Kong-listed Chinese equities, while the A-shares, consisting of Chinese companies’ stocks listed in Shanghai and Shenzhen and denominated in RMB, are still absent in most global or regional portfolios because they are excluded from indices. This is the reason why this strong correction has had little impact on global markets.

On the back of strong liquidity, reform momentum and a surge of interest among domestic retail investors (also boosted by easy access to margin financing), the A-shares market had staged an impressive rally from November last year to its peak mid June 2015 before going through a 30% correction. We do not expect the downturn to have any implications on Chinese consumption. 95% of Chinese do not own stocks, and stocks investments represent 6% of households’ assets.

The authorities stepped in with an unprecedented series of supportive measures in order to stabilize the market. The fear that the market was on the brink of collapse led to intensified intervention following the unsuccessful first round of rescue attempts. Many of these measures, such as pushing brokers, fund management companies and large shareholders to commit long term investments are positive, as they address the lack of institutional capital, one of the main shortcomings of this market where 85% of the trading is done by momentum-driven retail investors.

We welcome this, as well as a critical evaluation of margin financing practice and IPO rules. Margin debt is a new concept in China, and its sharp increase among unsophisticated investors has worried us. Multiple IPOs, often underpriced to guarantee their success at launch, have drained liquidity as cash subscribed needs to be deposited by participants. We have avoided those. 

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