Shaun Rein
Shaun Rein

After a one-year spurt of 50 percent, Chinese stocks fell this week suddenly. And there is more trouble to expect tells business analyst Shaun Rein in Money Control. The growth lacked fundamentals, he explains, and that explains the volatile state of the Chinese stock markets.

Money Control:

A: As I said earlier, there are sort of two things that are happening. One is that a lot of Chinese investors are getting back in on the margin but as you rightly pointed out the new margin rules are sort of cutting things back. So there is going to be less liquidity tin the market place but the main thing is consumer psychology.

If you look at the rise in the last six months it really has not been due to any fundamentals. If you look industrial profits are getting squeezed down, economic growth is slow. So there has been no real profit or fundamental reason why the Asia market is going up. It is that people have been investing in because they think the market is going to go up.

So what happens is there are all these individual retail investors who are considering adding money in and adding more money in most of these investors got burned a decade ago and as soon as the market started dropping they came out very quickly and that is why you see a seven percent drop today. You are going to see ups and downs that are very volatile, very dramatic in Asia market. Investing here is not for the faint of heart.

Sumaira: That is true actually because in the last 12 months, the market has seen a surge of about a 140 odd percent and a lot of this was fuelled by margin financing. Some of the data that I have says that outstanding value has actually hit a record 2 trillion yuan on Tuesday itself. So, can you give us a sense of, with these new rules being put in by the brokerages, how much lower do you think the market could head from here?

A: I still think it is going to hit where we were before when I spoke to you earlier this week. You are going to see a dramatic drop, 7-8 percent. We have actually been interviewing investors today and a lot of them are saying that they might jump back in tomorrow or maybe come back in next week. They just want to wait and see if you are going to see a drubbing in the markets tow-three days in a row.

So, you have to think, in the United States most shares are held by institutional investors — mutual funds , hedge funds. They tend to buy and hold longer and China, most of the shares are actually are run as a larger percentage by individual investors. You have to think of the Chinese Asia market as like millions of little individual private hedge funds that are going in and out trading on a very regular basis and that is why you see such fast drops and also such gains. I actually think that you are still going to see a 5-10 percent growth in Asia by the end of the year but it is definitely not going to be stable, it is going to be up and down.

More in Money Control.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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