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 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 $19 billion in scarcely more minutes on Wednesday,
tumbling 47 percent on no news before the stock was suspended.
Thursday brought similar tumbles in the linked Goldin companies,
which fell more than 40 percent each, slashing their value by $23
billion. 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 percent of all China stock market
capitalization is financed by debt. Margin debt in the United States
is around 2.5 percent, 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 $300 billion, or 3.1 percent of
domestic market cap. State media reported in late April that margin
credit was growing at 5 percent of outstanding credit daily.
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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
percent 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 $3
billion 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 and find more columns at
http://blogs.reuters.com/james-saft)
(The opinions expressed here are those of the author, a columnist
for Reuters.)
(Editing by Dan Grebler)
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