The best time to judge the character of people is during times of crisis. For the world’s major investors, in this respect China’s authorities have been weighed and found wanting. The world’s leading Emerging Markets investment personality, Mark Mobius, is among the big money managers who are highly critical of the Chinese reaction to its market’s boom and bust. Half of the listed companies have simply suspended trading in their shares. And after other interventions failed, China’s Government has now banned big investors from selling their stakes in those businesses where trading is still allowed. At a Berkshire Hathaway AGM a while back, chairman Warren Buffett was asked whether he would invest in Russia, the “hot” market at that time. He said he wouldn’t, recounting his experience of some years earlier. Buffett had helped fund an exploration business which battled for years to discover anything meaningful. When it eventually hit a good deposit, Russian politicians claim-jumped it and the team of explorers had to run for their lives leaving behind all their equipment – and wiping out years of investment. In their efforts to address the collapse of an overheated share market, Chinese authorities now risk doubling its impact by alienating those who control the world’s long-term investment capital. Those of the ilk of Mobius and Buffett have long memories. – Alec Hogg
Ye Xie and Belinda Cao, Bloomberg
Templeton Emerging Markets Group calls it an act of “desperation.” UBS Wealth Management labels it “extreme.” And Wells Fargo Funds Management says it just “postpones the inevitable.”
China’s decision to ban major stockholders from selling stakes in listed companies has drawn skepticism from foreign investors. The money managers, with combined assets of almost $4 trillion, say the latest step to stem the country’s equity rout is just another measure to meddle in the market and won’t be enough to restore investors’ confidence.
“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. “It actually creates more fear because it shows that they’ve lost control.”
The China Securities Regulatory Commission said Wednesday that investors with holdings exceeding 5 percent as well as corporate executives and directors are prohibited from selling stakes for six months. The rule is intended to stabilize capital markets amid an “unreasonable plunge” in share prices, the CSRC said.
While China has already ordered government-owned institutions to maintain or increase stock holdings, the CSRC directive expands the sales ban to non-state companies and potentially foreign investors who own major stakes in mainland businesses.
ETF Plunges
Deutsche Bank will have to wait if it plans to sell its 20 percent stake in Beijing-based Huaxia Bank Co., a move that would help shore up the lender’s finances, according to Piers Brown, an analyst at Macquarie Group Ltd. Eduard Stipic, a spokesman for Deutsche Bank, declined to comment on Wednesday.
In a sign that foreign investors expect more losses, the biggest U.S. exchange-traded fund tracking mainland stocks tumbled a record 11 percent in New York. Deutsche X-trackers Harvest CSI 300 China A-Shares ETF has declined 23 percent over the past week. The Shanghai Composite lost 2 percent at the open on Thursday.
A 32 percent slump in the benchmark gauge has helped wipe out $3.6 trillion of market value in Chinese stocks since June 12 and prompted regulators to introduce support measures almost every night for more than a week. Other steps have included a suspension of initial public offerings and restrictions on bearish bets via stock-index futures. Policy makers have also made loans available to securities firms to buy shares.
‘Undermining Credibility’
In perhaps the most dramatic effort to stop the selloff, local exchanges have allowed more than 1,300 companies to halt trading in their shares.
“The measure can be effective in the short term because you are not going to allow people to trade,” said Jorge Mariscal, the emerging-markets chief investment officer at UBS Wealth Management, which oversees $1 trillion in invested assets. “But they are undermining the credibility on the soundness of the regulatory framework going forward. Things are a little extreme and counter-productive.”
As China’s record-breaking equity boom goes bust, President Xi Jinping is intervening in an attempt to prevent the rout from eroding confidence in his leadership. The moves have cast doubt on the Communist Party’s pledge less than two years ago to give market forces a bigger role in the economy, which is part of its largest reform drive since the 1990s.
Market Intervention
“When Xi Jinping stressed the ‘decisive role of market forces,’ I don’t think this is what he had in mind,” Jim Chanos, the founder of hedge fund Kynikos Associates who predicted the collapse of Enron Corp. in 2001, said by e-mail.
China isn’t the only market with a history of state intervention. During the 1998 Asian financial crisis, Hong Kong bought shares worth $15 billion to prop up the market. In the U.S., the Securities and Exchange Commission temporarily banned short selling on some shares during the global financial crisis in 2008.
While the authorities should “pull out stops” as much as they can during a crisis, China’s actions may backfire by scaring away investors, said Burton Malkiel, author of the investment classic “A Random Walk Down Wall Street” and an economics professor at Princeton University.
“I am not sure this is going to work,” Malkiel said by phone. “When the government does this, it might be a sign that ‘Oh my God, the government is panicked and we ought to get out even sooner.’’
Exchange Link
Under current mainland rules, a single foreign investor can own as much as 10 percent of a company’s issued shares. China has allocated investment quotas of about $138 billion through its so-called QFII and RQFII programs for foreign money managers, which include BlackRock Inc. and HSBC Global Asset Management.
International funds have gained unprecedented access to the mainland market through an exchange link with Hong Kong. Foreigners have sold a net 33.4 billion yuan ($5.4 billion) of Shanghai shares through the link over the last three days.
‘‘The extent to which they can apply this to foreign ownership interest remains to be seen,’’ said Brian Jacobsen, who helps oversee $250 billion as the chief portfolio strategist at Wells Fargo Funds Management. ‘‘They are grasping at straws to find a way to stop the selling pressure.’’
