Shanghigh

Save us, China! Since Lehman shook the world, every main stock market is down: among the biggest, declines range from a quarter in the UK to a third in the US. All, that is, except China, sitting atop a 16 per cent gain. Increasingly, a good day in Shanghai nudges up markets elsewhere, especially in resources-led economies.

It shouldn’t. A surge of initial public offerings in recent years means China’s market cap is now 73 per cent of gross domestic product – in a similar league to the US (68), the UK (67) and Japan (64). But that is where comparisons end. Shanghai is still a mockery of a market.

The main reason is overhang. China’s wholly state-owned parents have shoved most of their productive assets into listed subsidiaries, retaining perhaps four-fifths of the shares. The expiry of post-IPO lock-ups has meant that the proportion of technically tradable shares has risen to more than 50 per cent. But since the vast majority of those are still in state hands, they will not be traded. A share price in China represents the value of the share – it tells you next to nothing about the value of the issuer.

The second is restricted access. In recent rallies, markets dominated by local investors – Taiwan, Korea, Malaysia – have outperformed more open exchanges. China is the ne plus ultra of domesticity: licensed foreigners account for just over 1 per cent of the market cap. Given capital controls, Chinese investors have no alternative if they want exposure to equities. Anecdotal evidence from corporate treasurers suggests that perhaps a third of the bank loan explosion this year has ended up in stocks. Then there is spasmodic state intervention. The finance ministry regularly tweaks stamp duty to tease the index up or down. IPOs have been frozen for at least six months. There is still no sign of the promised index futures to provide mechanisms for hedging. Knowing all this, participants make little pretence towards value investing. Shanghai is a speculative free-for-all ruled almost entirely by momentum – a poor indicator of the health of a nation or, by extension, a global economy.

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