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Suspend your disbelief

9 Jul 2015 By Quentin Webb

Trading halts add to China’s Potemkin market problem. Boom, bust and bailout are already making it hard for outsiders to take Chinese stocks seriously. An extraordinary slew of trading halts, trapping investors in hundreds of stocks, makes things worse. Bosses and bourses are buying temporary respite at the cost of their own credibility.

China’s leaders are used to getting their way. Hence their kitchen-sink bid to bring a disobedient market to heel: cut interest rates, curb short-selling, boost margin lending, search for scapegoats, get brokers buying and, most recently, forbid big shareholders from selling for six months.

Those top-down wheezes, which on the morning of July 9 finally appeared to be turning the tide, are matched by an equally iffy bottom-up trick. As of July 8, Reuters reckons some 1,300 Shanghai and Shenzhen-listed firms, worth $2.4 trillion, had halted trading. It’s hard to think of any other market where this has happened on such a scale. Bosses are abusing stock market rules that should be used sparingly, ahead of a big deal for example, and exchanges are playing along.

To be sure, the halts are clustered in smaller stocks, so this hurts individual investors, the boom’s main culprits, more than blue-chip focused institutions. The direct hit to foreigners, who own just 2 percent of the market, is small.

Still, this sends a terrible signal. What is a market if you can’t set prices or trade? Firms look like they have something to hide. And valuations were pretty frothy, so the moment of reckoning is probably just delayed. That’s unless you think firms like Hainan Rubber or Cecep Wind-Power – to pick on just two big stocks that seized up on July 8 – are fairly priced. They shut up shop with $4 to $5 billion in market capitalization, and valuations of 238 and 109 times forward earnings, respectively.

The market may at last be steadying. But it seems incredible that just last month China’s non-inclusion in key international indexes looked so close-run. The message from executives and politicians alike is: everything is fine, just don’t look too closely. Such a Potemkin Village view of markets should worry investors.



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