What Institutions?
China has institutions? Who knew?
By blackhedd Posted in Economy — Comments (9) / Email this page » / Leave a comment »
As a brief followup to my piece yesterday on the recent action at the Shanghai stock market, I was interested to read this wire story this morning.
As most of us expected, the Chinese equity markets stabilized overnight (if that's the right word to describe a session that gyrated from 7% down to 3% up). The AP wire attributes the higher finish to buying by institutions.
Something smells funny, and I don't think it's the duck. More...
From the AP story:
Chinese stocks rebounded in volatile trading Tuesday following their sharpest one-day drop in three months as strong buying by institutions offset selling by retail investors.
You should read the whole story (bylined Elaine Kurtenbach), as it contains a lot of good information. But I was very disappointed that she doesn't pay off that first sentence about last night's buyers.
China's large stock market in Shanghai is largely off-limits to non-Chinese. (Global investors are more or less free to buy and sell stocks that are traded on the Honk Kong exchange, many of which have American Depositary Receipts.) And by the way, the Hong Kong Hang-seng index hasn't been on fire with speculative froth all year, as Shanghai and Shenzhen have.
We've all seen the stories about the 100 million speculators pulling yuan out of mattresses and pouring them into the stock market. And it's a cliche (although a very true one) that in unsettled times, the weak hands always sell into the strong hands.
But I want to know who these "strong hands" are, that scooped up all the cheap stock that Grandpa Wu was dumping. We know that they had to be Chinese nationals or Chinese organizations. But does China actually have enough large financial institutions that are free to engage in this kind of trading? That's an incredibly important question for us, because one of the key industries where we should be successfully exporting to China is financial services and financial engineering.
It would be terrific if we could get any kind of data on block trading and who was on the buy side and the sell side from this exchange. I'm not holding my breath though. (Even in New York, this kind of transparency is rapidly fading in today's era of block-trade "shredders.")
But I wouldn't be the least bit surprised if this isn't all about some good old-fashioned insider trading. Corruption, Chinese-style. The stuff that makes China's world go around.
Or did our intrepid journalist just run out of ideas? Maybe she simply hit the shortcut-key on her keyboard that automatically inserts the kneejerk phrase "equity markets stabilized as strong buying by institutions offset sales by retail investors."
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What Institutions? 9 Comments (0 topical, 9 editorial, 0 hidden) Post a comment »
...but stock markets are a new one on me. Still, you have to ask yourself, if the government was in there buying, then who was front-running the trades?
I guess I can see it, though. (After all the Fed props up our stock markets by liquefying the banks when it has to.)
The Chinese market is extremely small. Try not to think in terms of our own market in trying to understand the violatile nature of their market.
Best comparison is General Electric / Exxon Mobil is the NYSE. It takes a lot of money and share volume to move the market.
Shanghai A & B markets are like a micro cap stock. It takes only a small amount of money and volume to move the stock price or markets.
Mike C
See here.
At perhaps a trillion dollars in total marcap, Shanghai is not "tiny," but it's certainly a microcap compared to New York or London. And the volatility is clearly a phenomenon generated internally in China, not reflective of any reality that we can trade here in the US.
But you see why I ask the question, though, right? If there is any way to see into that market, that's what I want to do.
To your point about GE and XOM (and I know you made the point just as an example): I'd argue against many people's view that our cash equity markets, as large as they are, aren't really as liquid as they could be. Certainly not as liquid as market participants would like them to be. The last time I was on the exchange floor (a few weeks ago), the specialists were bellyaching a lot more than usual about not getting enough good information fast enough to do their job.
Your question is important and unfortunately we will not be able to see into China's markets or at least find the information we would want to see. It would be very useful information.
I would say the markets are very liquid under normal conditions.
Should more information be provided to the public with greater frequency, the answer is yes. But compared to most European companies where they are required to provide financial reports and updates only once a year our domestic market provides the most information to shareholders, investors, traders etc.
Mike C
...than a business view. By information, I was thinking more about the order books, how the block trades are broken up across the trading day, and the various arbitrages that are floating around the world at any given point in time.
Something like 85% of the total trading volume in instruments that are keyed to equity values is now in derivatives. To me, that's strong evidence that the markets are hungry for liquidity. It hard to believe how quiet the floor of the NYSE has become, don't you agree?
You're so right about actual business information, though! I've often said the the US is the only place on earth where business are run for the benefit of their shareholders rather than of their managements.
They own a goodly number of companies. I wouldn't be surprised to find out that they have large financial holdings as well.
plays out. Institutional buying was attempted here to stop the 1929 market crash and didn't work and my guess is the very overvalued Shanghai index is due to drop a bunch more.
Perhaps not corruption, but an attempt by government institutions to manage a soft landing?
"No compromise with the main purpose, no peace till victory, no pact with unrepentant wrong." - Winston Churchill