Yesterday, as has been the case for much of the past few months, Chinese stocks staged another amazing rally.
Led by brokerage firms, the benchmark Shanghai Composite put close to 2%, extending the indice’s recovery from this year’s low to 28%.
The catalyst for the rally was news over the weekend that China’s stock market regulator, the CRSC, will allow the resumption of IPO listings following a ban put in place amidst the stock market rout in mid-June.
According to analysts at Credit Suisse, the resumption of IPO listings is likely to lead to further gains in Chinese stocks in the period ahead. They suggest it will introduce additional investor funds into the market, particularly as as the returns from an IPO subscription are, on balance, significantly higher than those in the money market and for wealth management products (WMPs).
“Individual investors believe the upcoming IPOs will bring them ‘risk-free’ returns as usual—they will move their money from the money market and WMPs to the equity market to chase better opportunities,” Credit Suisse note.
Risk-free returns, from a market that rose 150% in the year to June before crashing nearly 50% over the next three months?
Credit Suisse explain how the government essentially guarantees substantial investor returns, ensuring herd-like behaviour before and after a new company is listed.
“In 1H 2015, the new stocks were priced at 20-23x P/E, while the ChiNext market was traded above 70x P/E. Therefore, the new stocks generally increased 2.5x in the first 20 trading days,” they note.
“The new stock prices were controlled by regulators at ‘reasonable valuation’ to protect the interests of small retail investors. Therefore, the investors believe the return of buying new stocks is risk-free return, which is sort of guaranteed by the regulator.”
IT WAS a brief encounter—an hour of discussions followed by a low-key dinner—but one of great historical resonance. Not since Mao Zedong’s takeover of China in 1949 had there been any meeting between the leaders of China and the island of Taiwan, to which the defeated government of Generalissimo Chiang Kai-shek fled. At a hotel in Singapore, Xi Jinping, China’s president, and his Taiwanese counterpart, Ma Ying-jeou, clearly revelled in the symbolism, grinning and waving as they shook hands before a mass of cameras gathered in a ballroom. But China’s dream of eventual unification with Taiwan is no closer to fulfilment, and its suspicion of the island’s increasingly separate identity is undiminished.
Officials had given only a few days’ notice of the unexpected meeting, which took place on the sidelines of Mr Xi’s long-planned state visit to Singapore. Careful choreography aimed to ensure that both statesmen would be seen as equals. The two emerged into the flash bulbs together, but from opposite sides of the room. They had agreed to refer to each other using only the honorific “Mr”, forgoing titles such as “president”, which would risk conveying legitimacy. And both delegations have reportedly agreed to split the bill for dinner, and for the use of the hotel’s conference rooms.
The seeds of the meeting were some very immediate concerns. Ties between the two countries have warmed immensely during Mr Ma’s premiership. But term limits require him to step down at elections in January, when polls suggest the presidency (and perhaps the legislature) will fall to the opposition Democratic Progressive Party (DPP), whose members lean towards independence and are suspicious of China’s overtures. Mr Ma is presumably not foolish enough to think that kudos from the landmark meeting will give his party, the Kuomintang (KMT), a better chance of holding power. He may instead be thinking of his own political legacy, given that growing domestic opposition to recent cross-strait trade deals has left his and his party’s popularity in tatters. For the KMT, the resonance of the meeting goes back to 1945 when it ruled all of China. In August that year Chiang met Mao for the last time before full-scale civil war erupted. The discussions between Mr Ma and Mr Xi were the first between the two parties’ leaders since then.