Bull Run For Chinese Stock Market

When a stock market has a sustained bull run, there are always key underlying forces driving and sustaining the index at high levels. China stocks have been hot since 2005 when the bull came back. The key forces propelling the Chinese stock market for the next decade are the following:

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1. Aggressive Reminbi Appreciation. After the Chinese government’s decision to free the Reminbi peg against the Dollar some 5 years ago, the humble currency has continued to appreciate at a steady pace. Recently during late 2007, both the U.S. government and the European Union asserted strong pressure for the currency to appreciate more aggressively. U.S. wants a weaker currency so that its trade balance deficits could recover to a more reasonable extent and to reduce threat on recession. The Euro Dollar’s appreciation against the U.S. Dollar over the past few years has been faster than the Reminbi. They want China to keep in pace so that their export prices would remain attractive to EU’s trading partners. Chinese government has finally decided to let markets and its trading partners fulfill their wish, at least partial. The Reminbi appreciation will gain faster pace from 2008. This is also a Chinese government’s tool, using this trend to curb its rising inflationary pressure. Stronger currency would help to buy foreign raw materials such as oil, iron ore and U.S. agricultural exports at lower prices, hence would reduce the cost bases of the Chinese consumer market. The appreciation trend, some betting for Dollar to Reminbi conversion of Rmb 6.00 by end of year 2009, is attracting huge sums of foreign funding into the local financial markets. With so much liquidity in the market propelled by these foreign investment firms, China stock market is firmly supported for its long-term bull run.

2. Very Strong GDP Growth. GDP growth of China is averaging 10% for the past 10 years versus 3% to 5% in the western developed nations. This is due to the open-door economy policy announced some 20 years ago, which led the country into the current prospering stage as the largest manufacturing base in the world. Many of the large traditional state-owned enterprises went through restructuring and IPO in Hong Kong and China’s stock exchanges. With more cash in hand, these Chinese companies are able to push for upgrading their overall industry structure and hence exports of higher-end merchandises. This will immensely escalate export values in the coming years and decades. Stock investors see their future and bet on their fundamentals. The optimism of these stock investors is the realistic expectation for strong growths in many sectors, especially the natural resources, finance, telecommunications, and environment related companies.

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3. New Accounting Principles from July 2007. With the new Accounting Principles, company asset values are assessed in the current market value dollars. Those assets which are either not accounted for or valuated at the historical acquisition worth suddenly became extraordinary mega gains on the balance sheet. This increases the stock value of these companies as the share price over net asset ratio went down. And more importantly, these assets with much higher values are collateral vehicles for financial borrowings, pushing for acquisition of overseas ventures and internal capital expansions on manufacturing facilities or servicing infrastructures.

4. New Tax Policy – Combination of 2 systems The base tax rate for both local and foreign-funded enterprises has been 33%. But for foreign businesses in special zones the discounted rates were either 24% or 15%. The local entities with small profits are asked to pay either 27% or 18%. As the WTO transitional period comes to an end. These different rates now need to be unified for a conducive business environment of tax standardization and fair market competition. From January 1st 2008, Chinese government implemented a new Tax Policy to apply the same tax rates to both foreign and local companies. For the over 1,000 companies listed on the A-share markets in Shanghai and Shenzhen, the positive reduction of the previous rate of 31% to 25% unified rate with the new policy, the after-tax net profits would be raised significantly. When the earning per share increases, the lower PE ratios would contribute to the bull sentiment for buyers.

5. Major World Events in China Olympics 2008 has been drawing significant global attention and business opportunities to China, especially the Capital City – Beijing. Like many past Games, the organizing countries would benefit tremendously from tourism, publicity, advertising incomes, FDI and increasing business volumes. After the Beijing Olympics, Shanghai is hosting the World Expo 2010. International corporations are aiming to escalate their business presence to new highs through this major 6-month event. Guangzhou and Shenzhen are catching up as well as they prepare for the 16th Asian Games 2010 and 26th Summer Universiade respectively. These major sports and business events help to paint a better success scenario for the China economy over the next decade. This increases the positive investing mood in the China stocks.

If investing in stocks is a probability game, I think the 5 key forces discussed here would definitely assure investors of higher odds on your investment on Chinese counters. But beware that we still need to differentiate the bad companies from the quality stocks, this would further reduce the investment risks and raise your profitability. All the best if you decide to take on the China hot stocks.

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