Investment Trust Dividends

China

Posted on  | By Bruce Packard

Bruce remembers a metaphor from the founder of the Georgian Stock Exchange and wonders how it might apply to Chinese financial markets.

The FTSE 100 was up +2.2% to 7653 last week. The Nasdaq100 and S&P500 rose +2.4% and 1.1%. Brent Crude was up +4% in the last 5 days, most of which was on Monday morning. Chinese stockmarkets have bounced with the FTSE China 50 up +8.3% and the Hang Seng +7.5%.

The FT has reported that the Chinese authorities have tried to halt the sell-off in domestic equities. For instance, institutional investors have been told not to sell equities and short selling has been curbed. That might explain the short-term bounce but the FTSE China 50 is still down -31% in the last 12 months. ETFs tracking US and Japanese markets are becoming increasingly popular among Chinese retail investors, such that mutual funds were hitting limits that were designed to protect capital controls. The Chinese Yuan (CNY on Sharepad) is linked to the US dollar – but allowed to fluctuate around a narrow band. If the CNY continues to weaken, that could also be bad news for commodities and mining shares.

Many years ago I met the founder of the Georgian Stock Exchange, a chap called Gogi Loladze. He cut a dashing figure and was something of a capitalist philosopher, in the style of George Soros. Autocratic leaders, he said, craft their own narratives, and prevent any data that contradict their stories from circulating. However, these autocrats feared financial markets, because liquidity requires buyers and sellers to trade on good (that is, not unfair) information. The financial markets are like a barometer, it tells you what the air pressure is, and if a storm is blowing in, the meteorological instrument will warn you. That’s in contrast to government statistics like GDP which can be manipulated by less scrupulous leaders.

Gogi was keen to develop the Georgian Stock Exchange because

i) it would provide an alternative source of capital in competition to the banking system

ii) it would strengthen Georgia institutionally, which at the time wanted to be the “Singapore of the Caucasus”

iii) it would make him rich.

Building any two-sided platform is hard and he couldn’t get to critical mass and benefit from network effects. The Georgian Stock Exchange still exists but is owned by the large banks, which are not keen to develop it for some of the same reasons above. As a generalisation bankers prefer “discretion” (also known as secrecy) to the circulation of financial information.

Since then it has struck me that Gogi’s insight from a former Soviet Union country could apply equally well to China, which is communist, and increasingly autocratic but has a huge stock market. The Chinese GDP figures were announced a couple of weeks ago and were in line with expectations at c. +5%. No one seems to have a convincing narrative on why Chinese equities are selling off, but I would be wary. Below is a chart showing the FTSE China 50 (XINO) has fallen for 3 consecutive years in a row.

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