Is there really a China story?
By George Chen
The opinions expressed are the author’s own.
I remember a veteran trader once told me of the three scenarios under which one should sell stocks.
First, sell when you start to sense the government is beginning to tighten market liquidity, indicated for example by a sudden influx of IPOs or a tougher monetary policy. Second, sell when you see almost everyone, from monks to neighborhood grandmothers, is buying. Third, when you see big banks such as Goldman Sachs downgrade their economic forecasts, which basically means they know they misunderstand something and have to fix the misunderstanding, sell.
So, this week Goldman Sachs trimmed its economic growth forecasts for China to 9.4 percent this year, from 10 percent previously, citing a recent run of surprisingly weak data, high oil prices and supply constraints. Goldman’s report created a buzz in the market, pushing some investors to sell further amid already weak sentiment. More banks are expected to follow Goldman’s move to trim their China forecasts in coming days and weeks.
Will Beijing be happy to see economic growth finally slow a little amid concerns of possible overheating in some sectors, for example, real estate? The answer is both yes and no. Yes, Beijing expects to see some cooling of the economy, but if it extends too far it could lead to massive money outflows, which would be an even bigger headache for the government than high property prices, in my view.
If you don’t trust Goldman Sachs’ forecast, you should trust gold prices — some traders shared a trick with me to forecast the timing of a market rebound. When you see gold (and other commodities) prices start to cool, then it may be an opportunity to buy stocks.
In the secondary public market, the most common question you can hear in China these days is: “where is the bottom?” Apparently, there’s little confidence of a reliable answer. Some say 2,700 points and others expect 2,600 or even 2,000 points if Beijing doesn’t do anything to improve market liquidity.
To tell you the truth, I’m more worried about the IPO market. According to IFR China, a Thomson Reuters service, Beijing-based online clothing retailer Vancl was looking to raise $1 billion from a U.S. listing in the fourth quarter, possibly the largest Chinese Internet listing this year.
One of my friends, who used to be a customer of Vancl only to give up in the end, was amused by the news. He bought some shirts from Vancl that were cheaper than what you might pay at a store, but the quality was also cheap.
These are details that investors and fund managers on Wall Street may not be fully aware of. What they learn about China is just a vague so-called “China story”. But what is the China story?
The growing question about the “China story” is the same as asking what the “China model” is. My political science professor tried to convince me there was no such thing as a “China model” — or “Beijing consensus” in other words — but just a China experience for the reference of others. And I say there is no “China story” in general.
China is so big that nothing can be simply translated into a uniform system. Even in the garment industry, every company has its own circumstances and problems and investors should do a better job of investigating before putting in real money.
Businessmen always say the IPO is not the end, but a new beginning for a company. But when you feel the global market environment is not so healthy, why struggle to list? You may say you want a bigger challenge.
Well, it’s true the market is undergoing a very challenging time. Do you know what my veteran trader friend plans to do this season? He just told me he has decided to take a holiday in June. “I’ll be back when I can get a clearer view of the market,” he said.
Does this make more sense to you than just a vague “China story” that your wealth manager is still trying to sell to you?
George Chen is a Reuters editor and columnist based in Hong Kong.
Photo: A man walks past an advertisement by HSBC promoting China’s renminbi or yuan related products and services, in Hong Kong May 17, 2011 REUTERS/Bobby Yip