China's stock market is the only one on the rise amid the sluggish global economy. After the Shanghai Stock Exchange opened its B-share market to Chinese citizens yesterday -- it had been restricted since its inception to foreigners -- all the B-share prices soared limit up. The small market, with only 114 companies and a daily turnover of just 300 million yuan (US$36.3 million) last year, is now very much in demand. Because shareholders are not likely to unload anytime soon, there is considerable room for B-share prices to rise.
Last year, B-share prices soared by 136 percent in Shanghai and 63 percent in Shenzhen. The outlook for the future appears rosy, given China's plans to merge its A and B markets in the future, the country's projected 7 percent economic growth rate and its possible entry into the WTO by the end of this year. In terms of both economic fundamentals and market prospects, China has become the latest paradise for international investors.
Taiwan's investors will certainly not pass up such a juicy pie. Some brokers have already opened investment channels for Taiwanese wanting to buy Chinese shares. The novelty and allure of the B-shares are just the latest attraction to draw Taiwanese capital across the Taiwan Strait. This will only intensify Taiwan's capital drain and worsen the difficulties facing the economy.
But despite the B-shares' rally, stock markets in China contain many traps about which overseas investors should be wary. One, the markets are still heavily influenced by the Communist Party and the government. They also resemble Taiwan's stock market of 10 years ago in that they are heavily dependent on major speculative investors and therefore carry extremely high risks. Trading in the B-share markets is like jumping into a deep-water whirlpool. Who knows what dangers lay beneath the waters?
Two, China has opened its B-share markets in order to attract foreign capital, but the country's economy is still a long way from being completely open. Even if one makes profits in the stock market, the snail-paced transaction procedures may squash the on-paper profits before one gets to sell a single share.
Three, China's financial markets are still restricted. Taiwanese and other foreign investors have to remit capital from abroad because they cannot raise capital from China's banks. Nor is it easy to repatriate profits overseas. Because investors are unable to repatriate their short-term profits, their capital may sit there until the B-shares turn bearish and profits evaporate. The flow of capital is not free and there are major problems in capital security.
Four, China's stock markets rely more on major speculators than business fundamentals. In addition, the lack of transparency makes it difficult, if not impossible, to verify a company's figures. Because identifying false information and rumors is difficult, an investor in China's stock markets is like a blind man riding a horse. Unless one has enough cash to compete with the major speculators or entrusts one's investments to highly professional funds, one can hardly avoid the high risks. The rosy prospects for the B-share market could, therefore, simply be the sugar coating on a poison pill.
Investors from Taiwan do not have to actually lose money in China in order to cause harm to Taiwan's own stock market. The damage is done the moment they remit their capital to China.
Those who are already on the B-share bandwagon may expect considerable profits, but if you have missed the ride, don't hurry. Once the big players pull out of the market, the euphoria over the expansion will vanish as well and you will be on your own. Big bucks can make for a big bang, but they can all to easily lead to a big bust.
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