Why did China's stock market crash?

Chinese stocks : After the crash

Warren Buffet did everything right once again. The billion dollar American investor parted almost completely from its stake in the largest Chinese oil company Petrochina last summer - with a profit of around 500 percent. A short time later, the downward slide on China's stock exchanges began, which will continue even before the start of the Olympic Games on tomorrow Friday.

Broken investor dreams

In the summer of 2007, Chinese private investors in particular were still in a frenzy. They play a major role on the Chinese stock exchanges - mainly because there is a lack of investment alternatives. At its peak, up to a million new share portfolios were opened every day. The indices of the Chinese stock exchanges shot up by more than one hundred percent within a very short time.

But around nine months ago the bubble burst. Measured by the Shanghai Stock Exchange index, anyone who has invested in China has been around 50 percent in the red since the beginning of the year. In the CSI 300 index, which reflects the development of the 300 largest stocks in Shanghai and Shenzhen, almost a trillion dollars vanished into thin air. Petrochina’s stock, for example, fell below its issue price.

Limited access

Now some analysts and fund managers are advising to take another look at China's stock exchanges. Others, however, believe that the bottom has not yet been completely reached. Anyone who wants to get directly involved in the Chinese stock market is initially faced with a clutter of terminology. Because the Beijing state apparatus regulates purchases by foreign investors. The A-shares traded in the local currency Renminbi-Yuan on the stock exchanges in Shanghai and Shenzhen are reserved for Chinese investors and so-called “Qualified Foreign Institutional Investors”, which are primarily funds and banks. Ordinary retail investors can only buy B shares, in Shanghai in US dollars and in Shenzhen in Hong Kong dollars. Alternatively, there are H shares, which are the papers of Chinese companies that are listed on the stock exchange of the former British crown colony Hong Kong. However, with the Hang Seng index there, as an internationally established stock exchange, Hong Kong often follows different laws than the indices on the mainland. The Hang Seng Index, in which both Chinese and British-Asian companies such as HSBC are represented, has only fallen by around 21 percent since the beginning of the year.

The best funds

If you want to save yourself the agony of choosing among hundreds of stocks, you can now invest in well over 50 different China funds, most of which are shares in the most important Chinese stock corporations such as the oil and gas companies Petrochina or CNOOC, the telecommunications companies China Mobile or China Unicom or the Industrial and Commercial Bank or China Construction Bank. The fund rating company Morningstar lists Allianz RCM China (WKN 989859) with fund assets of 125 million euros as one of the best in terms of one and three years. An investor who would have invested 10,000 euros in the fund in January currently has just under 7,000 euros. With this, however, fund manager Christina Chung has shown a lucky hand, because funds such as Baring Hong Kong China (ISIN IE0000829238), which has been on the market for 26 years and manages a volume of 5.6 billion dollars, lost significantly more at 38 to 45 percent since the beginning of the year .

Experts see bargains

In general, despite the crash, the following applies: Those who have already invested for a longer period of time are still well in the plus. Investors who invested their money in Allianz RCM China five years ago can look forward to a 175 percent increase. "At the beginning of the year we drastically reduced our holdings in more aggressive stocks in the telecom and banking sectors and took a more defensive orientation," says Weijun Yin, China expert from the Allianz Global Investors fund team. Funds such as Metzler Chinese Equity (WKN 989437), Schroders ISF China Opportunities (WKN A0JDNN) or Templeton China Funds (WKN 973909) also held up relatively well in the bear market. The reason: A large part of the capital is invested in the somewhat more stable markets of Taiwan and Hong Kong (“Greater China”), and oil companies are overweighted. After the heavy losses, Allianz expert Yin now believes that the market is “severely oversold”. Buy prices have been reached again for many stocks. However, a majority of investors are still waiting for a final sell-off. Emerging markets guru Mark Mobius from Templeton is currently suspecting “respectable bargains” on China's stock exchanges. The manager of $ 47 billion in investment funds announced at the end of July that he himself had already increased the proportion of China in his own portfolios. Metzler's fund management also considers the risk of further price declines to be limited. The fact that Beijing is rumored to want to set up a stabilization fund to support the stock exchanges could have a positive effect.

However, the British fund specialist Schroders warns against ignoring the risks of an exposure to China. The generally high raw material costs also put a considerable strain on the profit development of Chinese companies. Since the state holds stakes of up to 80 percent in some of the larger companies, the published data cannot be trusted one hundred percent, warn critics. "China is far from being a free market economy," confirms Allianz expert Yin.

Index funds do well

How difficult it is to select stocks correctly in China is shown by the fact that even in the bear market, not a single fund was able to outperform pure index stocks. Morningstar therefore advises looking at so-called Exchange Traded Funds (ETF) for Chinese indices, of which six different are now on the market in this country. These include, for example, the iShares ETF Dow Jones China Offshore (Isin DE000A0F5UE8), which was launched in March 2006. The Dow Jones Offshore index includes 50 Chinese stocks that are listed either in Hong Kong or on a US stock exchange, including China Mobile, the China Construction Bank and Petrochina. There is also an ETF from Lyxor, i.e. from the Société-Générale Group, which simulates the Hang Seng China Enterprises (Isin FR0010204081). The index comprises mainland Chinese companies listed as H shares in Hong Kong. The advantage compared to normal equity funds: There is no issue surcharge, which is usually five percent for China funds, and the ongoing fees are significantly lower at 0.6 to 0.7 percent per year. Instead, when you buy ETFs on the stock exchange, you have to pay a normal order fee like you would with a share. Since the beginning of the year, all ETFs have been between 26 and 27 percent in the red and thus as deeply in the red as the best normal China equity funds.

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