First, the Chinese banking authorities squandered clients' money on policy lending. Then communist bureaucrats stole yet more from them through a stockmarket scam.
Want to know how to amass a small fortune ... ? Invest a large fortune in stocks on the Chinese mainland.
Large fortunes were made when Beijing allowed Chinese citizens to embrace foreign currency-denominated stocks. Now losses are being registered that will likely hurt the most vulnerable.
And the biggest winner was a corrupt communist regime that bought time by initiating a stockmarket scam that enriched it at the expense of others. Such actions would have earned prison sentences for private individuals if they had tried to pull it off. What has happened was a classic case of "ramping" where prices are pushed up so that insiders can sell down their position when prices peak.
Valuations topple
Valuations on stocks once reserved for foreigners but opened to domestic investors have plummeted in recent weeks and are now at 52 week lows. These two bourses have shed over a quarter of the gains following the run-up in prices caused by speculative pressures after the B-share markets were opened in February.
It turns out that the so-called B share markets had the largest losses in the world for July. Shanghai's B share market recently recorded its largest one-day drop in four-and-a-half years, and Shenzhen's market found its lowest level in five months. Hong Kong-listed mainland shares and so-called red chips are also under pressure.
Yet valuation of these shares remains at speculative proportions. On average, B shares trade at an average of 58 times earnings from the most recent reports.
By contrast, US shares remain relatively overvalued at about 22 times earnings. Domestic A shares that are sold in local currency only trade at 45 times earnings after falling from over 60 times for much of this year. Meanwhile, companies listed in Hong Kong (H shares) sell at 16 times earnings. The bursting of the stockmarket bubble underscores the risk of investing in China where policy changes can lead to substantial unexpected losses. None of this is surprising and reveals a deep strain of cynicism among policy makers in Beijing. This is evident in comments by some economists who are suggesting that this is a "healthy" adjustment. Such callous remarks overlook the fact that Beijing promoted the conditions for the bubble and then benefited from it.
This is because the opening of the markets to domestic investors occurred without any accompanying improvements in the operational quality of listed companies. It is clear now that what has happened was a massive expropriation by the central government.
The declines were the result of a combination of events. First, there was a sell-off of state-owned shares that began this past May to cover Beijing's commitments for social welfare programs. After topping up its own coffers, the authorities sparked another selling wave by investigating the use of bank loans to finance market speculation. Announcements in newspapers and other leaks heralded crackdowns on illegal use of bank loans and market irregularities.
In all events, there is an ongoing excess supply on China's markets that will continue to depress prices. On the one hand, bank loans used to buy shares are estimated to be as much as 600 billion yuan. If investors are forced to unwind their positions, the markets will fall even further. At the same time, nearly 30 companies have announced plans to list shares in Shanghai and Shenzhen over the past six weeks.
Inept and dishonest
Most of these problems can be traced to a combination of ineptitude and dishonesty on the part of the central authorities. As it is, there is a lack of reasonable alternatives for savers to place their funds in China.
Simply stated, China is a crapshoot with the risks of gains or losses left to chance rather than economic or commercial logic. You have to pity the Chinese peasants and urban workers. Those who entrusted their money to state-owned banks have seen between 25 and 40 percent of their hard-earned savings squandered on policy lending that led to an ocean of nonperforming loans. Now the communist authorities in Beijing have stolen yet more from them through a stockmarket scam.
For those who are looking for someone to blame for this mess, it is clear that Beijing is playing fast and loose with other people's money. But culpability also falls on those outsiders who have been so relentlessly bullish about China's current economic conditions and its future. For they have allowed as much damage to be done as the proverbial bulls in a china shop.
Soon bearish sentiments will begin to swamp all the nonsense and upbeat assessments about the viability of China's experiment with "market socialism." And when reality sets in, the illusions created by a corrupt communist regime and supported by its cheerleaders could bring another miracle economy crashing down to earth.
Advice to the wise: Better get out of the way fast, because this will be a big one!
Christopher Lingle is Global Strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.
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