The Gambling Culture In China And Suggestions for its Market

Mr. Hugh Young, the Managing Director of Aaberdeedn Asset Management Asia, has a nice piece published on FT.ocm titled, Gambling culture fuelling China’s market

The following suggestion made by Mr. Young on how China could improve its market is certainly extremly interesting.

• In terms of economic controls, the obvious thing to do would be to raise the cost of borrowing, but this would have ramifications across the economy, attracting further speculative inflows and putting more upward pressure on the currency. The suspicion is that Beijing doesn’t want to see its retail investors shouldering large losses if its actions caused the market to plunge.
  
  Perhaps the Chinese government should look to increase supply by having more initial public offerings of state businesses. One option is to accelerate the listing of H shares (Hong Kong Stock Exchange) on the A share (Shanghai stock exchange) market, which would mop up some liquidity (and improve the standard of listed companies on the mainland). But right now the government is more interested in encouraging flows the other way. It has reduced barriers to domestic investors investing overseas, which is sensible, but investors are disinclined to diversify when they think returns will be better in their own market.
  
  Whether the government takes radical action and succeeds in cooling the stock market, or whether it ends in tears for local investors, the impact on the wider economy, as with Taiwan, may be limited. There has been a flurry of IPOs but many businesses and industries are still state-owned, somewhat immune from fluctuations in bourses. Furthermore the government has the saving reserves to invest if capital from the stock market dries up. Depending on the degree of the fall, economic growth may slow – no bad thing, as it would ease the inflationary pressures in some parts of the economy.
  
  We would welcome a slowdown in China’s stock market and economic growth as we have been concerned for some time about the rate of its rapid expansion. However, it is unlikely to prompt us to change our strategy on capitalising on China’s undoubted potential. As long-time (and long-term) investors in China, we’ve always been more comfortable investing via Hong Kong, including H shares. In general, companies there are of better quality and better regulated than on the mainland. (That said, at least we are now seeing profit margin improvement on the mainland and real earnings growth.) So they provide a more prudent way of gaining exposure to China’s growth.
  
  It’s worth highlighting that the mainland exchanges are in effect off limits. (China is still largely a closed economy for investment purposes.) We are disinterested observers, because we do not have any holdings there. That will change in time as market access and company fundamentals improve. But there’s no screaming urgency for us to plunge into the mainland while we see better quality at its edges.