I pointed out last month that the Chinese stock market was riding on a horrible bubble, and would inevitably crash. And so it has come to pass, with the Shanghai Composite index down 30% from its June peak.
Now, 30% is a lot, but it’s nothing like the crash we saw in the West after the dot com boom, right? Well, bear in mind that the Chinese market is not a free one, and there is a daily limit by which a share can fall before it is suspended from trading — the Chinese regulators decide how much a stock will fall, not the investors buying and selling it!
No free fall
Companies are also allowed to suspend trading in their shares simply because they don’t want them to fall any further, and about half of China’s biggest shares are now suspended. And the Chinese government has ordered state-owned companies not to sell shares but to actually buy more, in a bid to prop up prices.
A spokesperson for the China Securities Regulatory Commission is reported to have said the Chinese market is “full of panic emotion and […] irrational selling has been increasing“. It’s a shame they didn’t say anything about the irrational buying that pushed the market up so high in the first place, but how can you trust a market whose regulators appear so clueless?
Steer clear
To say the Chinese stock market is a corrupt and manipulated one would be, well, accurate, and I reckon you’d have to be mad to invest in it — and I do feel for all those small investors in China who have borrowed massively to trade on margin. Of course, in the end the market will win out, and there’s nothing the ignorant dictators can do to stop people realising that so many of their shares are horribly overvalued.
What should UK investors do? I’d say keep away from investments in China itself, and that includes aggregated ones like investment trusts. Fidelity China Special Situations, for example, is down 23% since the start of July, to 123.8p, and down 32% since the beginning of May. And JPMorgan Chinese Investment Trust has done something similar, showing a 24% drop this month and 33% since mid-April, to 158p.
The other thing to do is be careful of companies listed in the UK that have operations (and often dual listings) in China. AIM, with its hopelessly inadequate regulation, is home to the riskiest of them — Asian Citrus Holdings is down 28% since mid-June, and DJI Holdings has fallen 18% since the start of June, as examples.
What next?
But what’s going to happen in China now?
With the Shanghai Composite still up 74% over the past 12 months (though down another 6% on the day), prices still look too high. And with margin calls coming in for investors every day, the frantic selling is sure to continue. And you know what? This is looking more like Wall Street in 1929 than the dotcom bubble of 2000, because it’s hitting all companies and not just one mad sector.