Chinese Stocks Are World's Worst In 2008
Paul Katzeff
Tue Sep 2, 7:04 PM ET

China won the most gold at the Olympics, but the country's stock market is in dead last.

After skyrocketing last year, the Shanghai composite has fallen harder than any market worldwide in 2008.

China stock investors and strategists remain bullish in the long term, but a recovery may depend on a global revival.

"The issue going forward is, 'When will equities around the world improve?'" said Donald Straszheim, a China specialist and vice chairman of Roth Capital Partners, an investment banking firm. "When that happens, China will improve, too."

But that hasn't happened yet. The Shanghai composite fell 0.9% on Tuesday to its lowest close since December 2006.

Year to date, the Shanghai index is down 56%. Hong Kong's Hang Seng index is down nearly 25% so far this year. Other China markets are in similar funks.

Sure, markets worldwide are getting hammered. But the Sino setback is more than twice the size of most others.

The rest of the world's worst -- South Korea, India and Russia -- were down "only" 25% to 29% going into Tuesday.

The S&P 500 is off 13% in 2008.

Last year, Shanghai erupted for a 97% gain. Only in hindsight does China look like a bubble that was ripe for popping, Straszheim says.

China's economy is still strong. GDP grew 10.1% in the second quarter vs. a year earlier.

That trumps the U.S. gain of 3.3% annualized, and the outright economic contractions in Japan and the euro zone.

Still, China's growth has slowed for the past four quarters. Evidence suggests a continuation of the trend as a global slowdown and credit crunch take their toll.

China's exports grew 12% in the first five months of 2008 vs. 18% in 2007, according to the World Bank. The rising Chinese currency also makes exports slightly less attractive. The yuan has climbed 6% this year vs. the dollar.

Industrial production also has cooled, though Chinese consumer spending is growing as fast as ever.

Investors fled Chinese equities out of fear of a growing flood of A-class shares, which trade on the mainland. Starting this year, the post-public-offering lockup period for many expires. About 10% of locked up shares become tradable this year. Another 25% unlock next year, Straszheim says.

Also, in the first half of 2008, the government pressed on the brakes to rein in white-hot growth and soaring inflation, says Samantha Ho, manager of the $207 million AIM China Fund (NASDAQ:AACFX - News). Ho is the investment director of Invesco Hong Kong, the fund's subadviser.

The People's Bank of China in June raised its reserve-rate requirement ratio for banks for the fourth and fifth times this year. The latest 100-basis-point hike took the rate to 17.5%.

"Sentiment increasingly turned negative on the back of the accelerating inflationary pressures, rising energy prices and fears of more global write-downs in the financial sector," Ho told IBD in an e-mail from her office in Hong Kong.

Chinese corporate profits are a classic glass half full or half empty.

Ho notes that recent earnings have been in line with or above consensus views.

She expects 18% profit growth for companies in the MSCI China index. Ho sees 19% growth next year, so long as the global economy does not worsen a lot.

But that's well off the 2007 pace.

"In most sectors, earnings were up 30% to 40%," said Straszheim, a former global chief economist for Merrill Lynch. "This year they'll be lucky to do 15%. That's up. But it still makes for very tough '08 comps."

The sharp sell-off has made more valuations attractive.

Meanwhile, with inflation retreating from decade highs, authorities have turned their attention back to promoting growth. The government is trying to turbocharge key export industries with moves such as boosting tax rebates for the garment and textile sectors.

China is loosening its chokehold on direct foreign investment. As a result, 50 non-Chinese financial firms can now invest directly in A-class shares. In April, regulators tripled the cap on the firms' investments to $30 billion. Ho sees that still-modest ceiling rising further this year.

Chinese officials fear that market volatility could spur social unrest. The government prefers to open the capital market gradually to avoid boom-bust market developments, Ho says.

China's infrastructure spending will help boost growth. On top of already planned buildout projects, Ho sees huge government outlays to remedy recent natural disasters.

Last winter's snowstorm, the worst in 50 years, caused 1.1 trillion yuan ($161.1 billion) in economic losses. Avoiding a repeat will require huge upgrades to transportation and power facilities.

The tab for fixing earthquake-torn Sichuan is estimated at $44 billion.

"Robust economic growth, structural improvements, ongoing corporate restructuring, mergers and acquisitions, as well as asset injections should continue to drive corporate earnings momentum and improve the quality of earnings and assets," Ho said.

Still, for China to rebound, the U.S., Europe and Japan must come out of what Straszheim calls a recession.

Exponential growth can't last forever.

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1999 SL500
1969 280SE
2023 Ram 1500
2007 Tiara 3200

"Last year, Shanghai erupted for a 97% gain. Only in hindsight does China look like a bubble that was ripe for popping, Straszheim says."

Yeah, and nobody saw subprime coming either. That this would happen was obvious way before it happened. Anyone with even a basic knowledge of market history knows how run ups that large end.

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Jason Priest
1999 E430
1995 E420 - retired
1986 420SEL - retired

Some of the recession in the other parts of the world are caused by China's manipulation of their currency. I think Japan did this in the 70's and 80's. If they raise their prices, then they won't be as competative. They don't have a technological advantage over their competators.
Tom