China’s Richest Man Says Capital Markets ‘Suck’ in China; Investors Rattled by China Stock Market Swing

March 5, 2013, 8:22 PM

China’s Richest Man Says Capital Markets ‘Suck’

China’s richest man has a strong statement for those looking to invest: “The capital markets suck in China.”

Zong Qinghou climbed his way to the top of the list of China’s wealthiest by amassing a fortune of $12.6 billion through his privately listed beverage empire Hangzhou Wahaha Group Co. On Tuesday, he made clear he didn’t gain his wealth through the country’s stock market.

“When the ordinary people invest in it, the market should reward them with some benefits. But it does not,” Mr. Zong said on the sidelines of China’s annual parliamentary session, taking aim at speculators he says ruin the stock market for others. “The speculation has totally ordinary investors of any benefits.”The sentiment of the billionaire, who is also an NPC representative, speaks volumes about the state of the country’s capital markets, highlighting the monumental obstacles investors face in China as they look for places to park their money in hopes of a return.

In recent years, China’s stock markets have lagged and generally been sluggish, plagued by too many offerings and a slowing Chinese economy. China’s stock bubble burst at the end of 2007 after the benchmark Shanghai Composite Index rose to almost 6,000 points from about 1,000 two years earlier. But the market has never recovered from its collapse, loitering around 2,000 points ever since.

The retail investors that fueled the bubble in the first place remain scarred by the experience, and have mostly stayed away. A common complaint is that the only investors who make money from China’s stock markets are those with inside information.

The Chinese government has made efforts to restore confidence, in part by trying to crack down on insider trading. And China Securities Regulatory Commission Chairman Guo Shuqing has floated the idea of bringing China’s model closer to that of the West, reducing the role the government plays in approving initial public offerings and shifting more power to auditors and investment banks, to foster a more transparent market where the various players take greater responsibility for their actions.

Still, Mr. Guo first raised those ideas over a year ago and little change in that direction has happened since.

Mr. Zong, a classic rags-to-riches story, is considered one of China’s savviest entrepreneurs, having built Wahaha from the ground up after taking over a grocery store in 1987.

Wahaha saw a 6% profit margin on sales of its bottled water, teas and outfits from its clothing line reach 68 billion yuan ($10.8 billion) in 2011, up 24% from a year earlier, according to the most recent figures available from a spokesman. In the past year, the 69-year-old chain smoker has expanded his empire by opening a luxury shopping mall in Hangzhou, a Chinese city south of Shanghai.

Mr. Zong has stated time and again that he’s hunting for deals overseas but that the outlook in North America and Europe remains gloomy. The tycoon says he’d rather attract partners to China at this point, where consumers seem poised to spend more and therefore boost demand.

So rather than investing in the stock market, Mr. Zong is now looking to park money in high-tech projects. “We are looking for opportunities and will invest in anywhere that needs us in fields including bioengineering and energy-saving electrical appliance etc.,” said Zong.

Mr. Zong also waded into the country’s frothy debate over urbanization, urging the government to curb the expansion of large cities. “Some social problems are caused by excessive development of large cities, including healthcare issues,” said Mr. Zong. “ So it is better for urbanization to focus on developing small-and-median-size cities.”

The drinks magnate is one an increasing number of wealthy entrepreneurs who’ve found themselves on the list of NPC delegates in recent years – a phenomenon he thinks is only natural. “China’s economy is developing so rapidly, so there will be more rich people,” said Mr. Zong. “ As we are people’s representatives, of course we can represent the people well.”

March 5, 2013, 7:31 PM

Investors Rattled by China Stock Market Swing

After stocks on mainland China were rocked on Monday by their worst day of trading since 2011, investors are undecided over whether the three-month bull-run in Chinese shares is over.

While there are signs that the all-important contingent of retail investors is calling it a day, some say the recent fall was only natural after the market rose so quickly, and they are holding on for further gains.

Trading has been topsy-turvy in Shanghai. On Monday, the Shanghai Composite plummeted 3.7% after Beijing announced new tightening measures to control the housing market, pushing shares of Chinese developers off a cliff.

On Tuesday, the market made a substantial recovery, ending up 2.3%. Stocks recovered as China’s parliament kicked off its annual meeting, the plenary session of the National People’s Congress–an event that could result in some hints on the policy direction of the incoming government.

The sharp moves are the latest episode in a sharp recovery for China’s domestic stock market, which started in early December after the Shanghai Composite crashed to a multiyear low. The market suddenly revived, climbing 24% to its recent peak in early February.

With the market down 4.4% since then, some investors are now convinced that the good times are over–including some retail investors, who dominate the trading of China’s domestic stocks.

“The rebound that started in December has come to an end as heavyweight banks, a favorite of institutional investors, had already risen a lot,” said Mr. Liu a retail investor in Shanghai, who declined to give his full name. He said he sold his stock holdings after the market started to fall in February.

Recent gains in Chinese stocks were mostly attributable to a better outlook for the domestic economy. Last year, growth slumped to its slowest pace since 2009, but economic indicators over the last few months have reassured the market that Asia’s largest economy had avoided a so-called “hard landing.”

But Friday’s property measures cast a cloud over the economic recovery. The housing market is an important contributor to growth, affecting not just developers, but also companies that supply materials used to build houses, as well as banks that lend to home buyers and real estate companies.

“We are not that optimistic about the domestic economic outlook, especially following Beijing’s latest property tightening policies which could hurt the pace and magnitude of the economic rebound in the coming quarters,” said Thomas Wang, a partner at Shanghai Yaozhi Asset Management, which manages assets worth about 2 billion yuan.

“China’s stock market is likely to be under pressure in the second half of this year given rising inflation pressure and lackluster economic recovery,” Mr. Wang said.

Some investors see the recent declines as a natural development for a market that had risen so much so quickly.

Audrey Kaplan, senior portfolio manager at Federated Investors in New York, said Monday’s decline was “understandable” after the strong gains posted by Chinese stocks in recent months. Ms. Kaplan is overweight on China, via exposure to Chinese companies are listed outside of mainland China.

In fact, Chinese companies that are listed offshore have been subject to less volatile moves over the last few days than those listed onshore. This suggests foreign investors are less concerned by the property measures than their domestic counterparts.

The Hang Seng China Enterprises Index, which measures Chinese companies listed in Hong Kong, fell by 2.1% on Monday and recovered 0.6% on Tuesday.

“We expect the new government is supportive of the equity markets,” said Ms. Kaplan. “We envision a continued recovery primarily because there are firm labor market conditions, improving domestic demand and relatively accommodative policy support not-withstanding the property measures.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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