Mark Dampier: 'The dragon has been chasing its tail, but keep the faith in China'

China's stock market has undergone a bull run, followed by a correction

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The Independent Online

Greece's economic storm has dominated the headlines in recent weeks. Yet given the size of its economy compared with the behemoth that is China, I would have thought the drama on the other side of the world would attract more attention.

China's stock market has undergone a tremendous bull run, only to be followed by one hell of a correction. In the grand scheme of things, surely events in the world's second-largest economy are more significant than those in Greece. After all, what happens in China has the potential to affect the entire global economy.

It is worth reflecting on China's bull run, which began around a year ago. Domestic, high net-worth investors initially began moving into the stock market after losing interest in areas such as property and private equity. And then, in September, the interest of foreign investors was sparked when the Chinese Government announced the launch of the Shanghai-Hong Kong Stock Connect, in an effort to liberalise stock markets in the People's Republic.

China had previously imposed restrictions on foreign investment, but the new scheme would offer retail investors direct access to mainland Chinese shares.

Money started flowing into the market more heavily, particularly from speculative, short-term traders, and this increasingly grabbed the attention of domestic investors.

Margin lending – borrowing money to buy shares – was also a big driver of the rally. Against the expectation of some commentators, the market continued to rise this year, helped by the growing excitement surrounding the potential inclusion of the Shenzhen market within the Connect scheme.

The recent setback has been exacerbated by a clampdown by the Chinese Government on margin finance – with retail investors having to sell shares to raise money in order to meet losses and pay back lenders.

In my view, the Government panicked somewhat over the recent stock market falls, with hundreds of Chinese companies suspending trading in their shares. At one point, 1,400 companies were under trading suspensions, accounting for 51 per cent of the total Chinese "A-share" market.

The Government had already taken a number of steps to prevent selling by Chinese retail investors, such as using state funds to buy shares directly; halting initial public offerings (new stock market listings); and cutting trading fees. The Chinese authorities then announced another raft of measures aimed at stemming the share price falls. The country's banking regulator said it would allow lenders to ease margin requirements for some wealth management clients, while investors with shareholdings of more than 5 per cent in a company were banned from selling shares.

While markets have since had some relief, they remain some way off their previous peak.

It is impossible to predict if a stock market has reached its lowest point. That said, I suspect we are somewhere close to being within 10 per cent of the bottom. Undoubtedly, the Chinese economy faces other challenges with slowing economic growth, mounting debt and a weak property market.

China's longer-term outlook should, however, not be forgotten, for it is in transition as it tries to move from an investment-led to a domestic consumption-led economy.

In the shorter term, I believe recent volatility is a blow for Chinese consumption, as high volumes of domestic investors have watched the value of their savings plummet.

That said, I would always encourage investors to focus on the long term and it should be remembered that China's transition is a multi-year, perhaps even a multi-decade, story. It appears to me that some investors in China are at one of two extremes: those who believe the market is going to implode and who probably should not touch the equity market; and those who believe we remain in the foothills of a longer-term bull run.

I would normally suggest broader exposure to the region via an Asia-Pacific fund. For a more specialist Chinese vehicle, I suggest taking a look at Fidelity China Special Situations. At the time of writing, it is trading on a discount of 19 per cent. The trust's new manager, Dale Nicholls, seems to be doing a fine job.

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