Many things about China stocks are funny, but probably not right now to investors in Hanergy Thin Film Power Group, Goldin Financial Holdings or Goldin Properties Holdings.
The three Hong Kong-listed shares, which had all increased in price several-fold in recent months, tumbled over the past two trading days in spectacular fashion. Solar company Hanergy’s market value melted by US$19bn in scarcely more minutes on Wednesday, tumbling 47% on no news before the stock was suspended. Thursday brought similar tumbles in the linked Goldin companies, which fell more than 40% each, slashing their value by US$23bn. Goldin Financial is a short-term commercial lender but has wide-ranging property interests, while Goldin Properties is a developer.
The companies issued various protestations of health and puzzlement. But, other than their vertiginous rise, rather meager earnings and very thin analyst coverage, no definitive explanation for the falls emerged. Hong Kong’s financial regulator in March cautioned investors about Goldin Financial, which has acted as an adviser to Hanergy, noting that its thinly traded shares were 98 percent held by just 20 investors.
A person familiar with the situation told Reuters that Hanergy Thin Film had been under investigation for several weeks by Hong Kong’s Securities and Futures Commission for alleged market manipulation.
Other than standing well back, there is little an investor can do in these circumstances. The facts will, or will not, emerge on their own time-table, or rather not on one favorable to outside equity investors.
What we can do is look at some stylized facts about stock markets in Hong Kong and on the mainland, from which it is easy to draw some broad conclusions.
To put it simply, China is in a speculative mania that is being stoked, and sometimes tamped, by the government as a tool to other ends.
Because this is happening on earth, where the laws of physics still prevail, eggs and hearts will be broken. Because it is happening in China, how that plays out; who gets rich and who loses money, is really not so simple.
Debt-financed equity investment has exploded in China. Credit Suisse estimates that 6% to 9% of all China stock market capitalization is financed by debt. Margin debt in the United States is around 2.5%, according to Fitch Ratings. If you presume that many company owners have large holdings with no debt, not to mention state-owned companies, that figure may understate the impact of debt on valuations.
While much of the debt-financed speculation is hard to track, coming through trusts and other non-disclosed sources of funds, margin lending is easier to get a handle on. Fitch estimates that margin balances at China stock exchanges has nearly doubled since the end of 2014, standing now at more than US$300bn, or 3.1% of domestic market cap. State media reported in late April that margin credit was growing at 5% of outstanding credit daily.
Predictably stocks are surging, the regrettable examples above excepted. The CSI 300 Index of Shanghai and Shenzen stocks has more than doubled since late September. The Hang Seng is up nearly 18% year-to-date, fueled in part by flows from the mainland.
Margin lending is such good business that companies, notably China Galaxy Securities Co., are selling stock in Hong Kong to fund equity lending. China Galaxy said it would use most of the more than US$3bn it raised in April via a Hong Kong stock placement for margin and stock lending and securities financing.
Underlying the boom is the belief that the Chinese government wants stock markets to rise, in part to cushion a needed transition from an investment-led to a consumption-led economy, as well as to soften an ongoing growth slowdown.
Note that the morning after Shanghai market turnover hit a record on April 21, the People’s Daily enthused that gains in the Shanghai Composite were “just the beginning of the bull market.”
“The Chinese government, which in the past viewed the stock market as a casino for speculators, now is using it to boost the economy and enable reforms,” Yardini Research said in a report on Thursday.
That may well be. If you think “Don’t fight the Fed” is a prudent investment philosophy, then you certainly ought not to resist a Chinese government with comparatively far more influence over what happens in its financial markets.
Which is not to say that there won’t be a bust in China stocks, not to mention more spectacular Goldin-style ledge leaps. China stocks are tough to bet against, but a hard way to make money and sleep well.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
