谢国忠

谢国忠搜狐博客　http://xieguozhong.blog.sohu.com/

The following was just printed in South China Morning Post.

There should be no bailouts for mainland stock market pundits, no matter how loud they scream

Andy Xie

Apr 17, 2008

Bubble glum

谢国忠搜狐博客　http://xieguozhong.blog.sohu.com/

译文在这里

Many pundits in mainland China are screaming for a government bailout of the stock market. Merely six months ago, the debate was about whether there was a stock market bubble. The same pundits cheered on the bubble, and claimed that international valuation methodologies didn't apply to the mainland market. That market has nearly halved from its peak in the past five months. Now, these pundits are shifting people's attention away from their bad calls by making loud noises about a bailout, appearing sympathetic to the millions who lost their savings on their advice. They even claim that those, like me, who oppose bailouts are unpatriotic. They merely hide their mistakes and ignorance behind a nationalistic mask; they disgrace Chinese nationalism.

Even though the market has nearly halved, the sad thing is that it still has considerable downsides. High valuation, a deteriorating earnings outlook, macro tightening due to inflation and the supply overhang are serious headwinds for the stock market. The bear market may last another 18 months.

In terms of valuation, the A-share market still trades at about 3.5 times book value. This would make it among the most expensive in the world. The market consensus is for 34 per cent earnings growth in 2008. The listed companies have achieved half as much thus far. The trend is down; earnings last year were grossly exaggerated by stock market gains from cross-holdings and asset injections. As the stock market reverses, the gains in 2007 are becoming losses in 2008. The chances are that the earnings growth will be 10 per cent to 15 per cent, at best, this year - and worse next year.

Over the next three years, the amount of so-called legal person shares becoming tradable will be comparable to the total amount of tradable shares today. Improving liquidity is good for the market in the long run. Digestion, however, could be quite painful. The acquisition prices for these shares are a small fraction of the current market prices. As there are considerable uncertainties over capital gains tax or even the legality of their acquisition, the owners of these shares have powerful incentives to cash out.

A major reason that mainland China's market has been expensive, even during a bear market, is the small free float. As all the legal person shares become liquid, the market will become more like others. Hence, the massive valuation premium of A-shares to H-shares may become a thing of the past.

The mainland is facing unprecedented inflationary pressure. Unskilled workers are finally gaining pricing power after seeing their wages stagnate for 10 years. This redistribution of the economic pie is good for the economy in the long run, but it is generating inflationary pressure across the board. Skyrocketing food and energy prices are also driving up inflation.

The government is resorting to price controls to contain inflation. This depresses corporate earnings and casts a bearish pall over the stock market. When this approach proves insufficient, Beijing may have to raise bank deposit rates above inflation to stop consumers hoarding essentials. When negative real interest rates disappear, the overvaluation of the property and stock markets are exposed. The return to normal valuations could send both markets down sharply.

A bubble is primarily a redistribution game. The losers are usually the weakest groups in a society. As with previous bubbles, those who have made money include insiders, controlling shareholders, market manipulators and even some government officials.

A stock market bubble on the mainland always redistributes wealth from the poor to the rich. It takes a really cold heart to cheer on a bubble, like many pundits did last year.

As stories of individual pain mount, the government is rightfully worried about social stability. But isn't it too late? No government can turn back the clock; it can only try to limit the economic damage.

Over the past two decades, the economy has shown little sensitivity to stock market fluctuations. Investment and trade drive the mainland economy. The former depends on bank loans, the latter on the global economy. Hence, the bursting of the stock market bubble won't have a major economic impact. The social impact, however, is considerable. Like gambling in casinos, the mainland stock market ruins many who are opportunistic. So, should the government bail out those who lost big in a casino? The government's money is the people's money, after all. Why should it be used to bail out gamblers?

The government should, instead, investigate the ill-gotten gains of the bubble. Did companies misrepresent their earnings? If so, did the controlling shareholders work with market manipulators to profit from the information? Did some government officials gain from insider information? If ill-gotten gains can be retrieved, they could be used to compensate retail investors.

China must prevent future bubbles; it is too late to stop the pain from this one.

谢国忠搜狐博客　http://xieguozhong.blog.sohu.com/