Leaked conversation reveals insiders’ secret A-share pessimism; “China no longer has any resilience as it has become a heavily indebted economy”

Leaked conversation reveals insiders’ secret A-share pessimism

The recording of two financial professionals sharing a bearish outlook during a private chat is made public.

By Lillian Liu | 27 February 2013

The leak of two industry experts’ private conversation about the outlook for A-shares has spooked the market, with retail investors waking up to the fact that domestic stocks may not be as attractive as many Chinese professionals would publicly claim.

The supposedly off-the-record chat between Cheng Dinghua, a well respected strategist at Essence Securities, and Xu Xiang, an influential fund manager at Zexi Investment, was recorded by a third party and released on the internet last week.

The conversation offers a rare opportunity into the true sentiment of Chinese industry professionals towards a market where only those with the right connections are able to make big profits, while the majority of retail investors are at the mercy of market conditions.

Of course, it adds more pressure on the already wobbly market. The benchmark Shanghai Stock Exchange Composite Index fell more than 3% last Thursday after the release of the recording. The market has shredded a further 1% since then.

Contrary to the views that equity analysts generally share in public, which suggest the bearish market is already behind us, Cheng noted the benchmark could easily fall to under 1,950 points — below the psychologically significant bar of 2,000 — in 2014 if inflation rebounded later this year.

Both Cheng and Xu said institutional investors would cash in their holdings during the recent weeks, and then the market would enter a long correction period.

Cheng said China no longer has any resilience as it has become a heavily indebted economy. If the banks don’t roll over their bad loans, problems will emerge immediately, but if lenders take quick action, the bad loans will surface later. So it’s just a matter of time.

The stock index has rallied nearly 7% to the February 6 peak of 2,434 points from 2,276 points at the start of the year, but the experts think the recovery is going to be weak this year.

Both Xu and Cheng strongly condemned the person who secretly documented the conversation and circulated it online. It is worth questioning whether there’s any behind-the-scenes manipulation since the conversation was recorded in late January and released one month later.

Regardless of whether their views are correct or not, retail investors, who contribute to more than 80% of A-share turnover, have taken it seriously. Market sentiment has deteriorated even in the run-up to the People’s Congress, normally a confidence-boosting affair.

China’s retail investors are difficult to educate, said one investment banker. “The get-rich-quickly mentality prevails, which causes reckless and irrational speculation in the market,” he said.

Other negative factors also add pressure on the market. According to the latest data from CSRC, there were 873 companies on the IPO waiting list as of the end of January.