HONG KONG: In a year that saw the biggest-ever destruction of Chinese stock-market value, investors who held on to the nation’s shares have actually done pretty well.

The Shanghai Composite Index has rallied 13 per cent in 2015, five times the average annual advance over the previous five years and crushing the MSCI All-Country World Index, which slumped 5pc. The measure spent all but 18 weeks of the year in a bull market, and about six companies have gained for each that fell.

Buy-and-hold investors would have needed strong nerves. After shares peaked in June, a 2 1/2-month rout wiped out $5 trillion in value, equivalent to Japan’s entire stock market. The Shanghai gauge has risen 25pc from the low and is heading for the biggest gain among major benchmark global indexes this quarter. While normality is returning to some corners of the market, the frenzied trading that marked the boom is absent, as the charts below show.

This year was “a roller-coaster ride for mainland stocks, but the index is probably where it ought to be,” said Sandy Mehta, the Hong Kong-based chief executive officer of Value Investment Principals. “Investors are focused too much on what happened in the middle of the year.”

For most of the first half of the year, the only way was up. Even as warnings about a bubble increased and price-to- earnings ratios climbed to the highest levels in five years, speculators borrowed record sums to bet on further gains.

When the reckoning came, it was swift.

The Shanghai Composite sank 32pc from a seven-year high in just four weeks as investors were forced to pay back loans.

With the rout presenting a threat to financial stability, the Communist Party took drastic steps. Major shareholders were banned from selling stakes, more than 1,400 companies were allowed to halt trading, initial public offerings were stopped and state agencies were ordered to buy equities. Stocks finally bottomed out on Aug. 26 at the end of a five-day, 23pc plunge.

As stability returns, the government is removing some support measures. IPOs resumed this month, signs of state buying waned and the ban on shareholder sales is set to expire in January.

To reduce the need for such extreme intervention again, China’s two exchanges will implement a circuit-breaker system from the start of 2016.

Other curbs remain. Trading in the country’s CSI 300 Index futures has fallen 99pc from this year’s highs after policymakers raised margin requirements, tightened position limits and targeted short sellers. Top executives have also fallen victim to a widening probe into the finance industry.

While valuations are still below levels reached earlier in the year, they aren’t cheap. The median stock on mainland exchanges trades at 74 times earnings, the highest among the world’s 10 biggest markets.

The Shanghai Composite, which has a heavy weighting in low-priced banks, has a ratio of 19. That compares with its five-year average of 13.

Bloomberg-The Washington Post Service

Published in Dawn, December 29th, 2015


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