I've avoided making any comment on this, but now that a quorum of sensible voices have emerged to help undo some of the collective panty-bunching that's happened this week, I thought I'd point out some of the people who've made sense. First up, Dan Harris of China Law Blog:
...stock markets rise and fall and business moves forward. Life goes on. My firm got two new China clients yesterday. One, an already good sized manufacturer who is expanding its China operations to beter serve its countless high end American manufacturing clients who are also expanding in China, and the other, an Internet company wanting to set up a China WFOE [wholly foreign-owned enterprise]. If anything, a better day than normal. China's stock market never came up with either client. I was not going to say a thing about it here on the blog, but changed my mind only after receiving a couple of e-mails expressing surprise at my silence.
I know major stock market shifts can affect an economy as a whole, but I do not see that sort of impact in China. Not now. Not yet. And I am not going to call it before I see evidence of it.
He also quotes another cooler-head, Andrew Hupert of Diligence China, who counsels "Don't just do something, stand there!"
I personally think we're already seeing funds take advantage of a huge buy opportunity on the Nasdaq- and other non-China-listed Chinese company stocks that, for whatever strange reason, reacted so strongly to the drop on the Shanghai and Shenzhen boards. Shit, the fundamentals are all still unchanged.
An investor had this to say to Forbes:
"Bottom line is that stocks are cheaper today than they were yesterday, so I am more optimistic now than I was a couple of days ago," says value investor John Buckingham, editor of the top-performing Prudent Speculator newsletter.
"Yes, China was down 9% [Monday] night, but that market had gained 13% in the previous six trading sessions and more than 150% since mid-2005," notes Buckingham, who adds that he now has 99 stocks on his "buy" list--up from 69 on Monday morning.
Deutsche Bank's Jun Ma weighed in with a thoughtful analysis on the triggers for the drop. (Thanks to Bill for sending this along):
Yesterday's 9% drop in Shanghai A share index-the largest single-day decline in ten years--and a 3% fall in the H share index were partially explained by the following speculations among market participants:
1) Feb CPI inflation is likely to be as high as 3% yoy and the PBOC is likely to raise rates in response to the Feb CPI figure;
2) The govt will form a special task force within CSRC to investigate into illegal securities operations;
3) The govt may adopt further measures to crackdown on illegal fund flows (bank lending and foreign funds) to the stock markets;
4) A capital gains tax is likely to be levied on stock transactions soon;
5) CSRC chairman Shang Fuling may not be in his position much longer;
6) PBOC governor Zhou Xiaochuan encouraged discussion of "whether there is a bubble in the A share market";
7) The govt may delay the implementation of management incentive schemes (eg stock options) at listcos;
8) Insurance companies were told to reduce their exposure to A share market;
9) Mutual funds selling; redemptions from retail investors; experts warning on A share market risk on CCTV yesterday, etc.
* Strong CPI inflation in Feb/Mar, a near-term rate hike, and new govt efforts to crackdown on illegal fund flows to A share market are very consistent with our expectations (see our strategy report on Jan 11 and a few recent notes on inflation and rate hikes). These concerns-which are most important triggers for yesterday's correction--will not go away within days and will most likely be confirmed by govt actions in the coming 1-2 months. This implies that risks to the A share market will remain biased to the downside at least in the very near term.
* The establishment of the CSRC special task force is a fact; it was reported by official press yesterday. It reinforces our expectation that new measures are likely be taken against illegal fund flows into the A share market.
* Points 4-8 listed above are too speculative and we are not in the position to comment on these. They are less important anyway.
* The fundamental reason for an A share market correction is its stretched valuation (trading at 26x 07 earnings vs 17x for MSCI China yesterday), and above points are just specific catalysts.
* We view another 15-20% correction of the A share index as needed and healthy, which should then justify renewed interest from many investors in A shares. Based on historical correlation, H share volatility is about half of that of the A share index (ie. if the A share index is down 20%, chances are the H share index will be off 5%). A 10% correction in the H share index from here will create attractive entry points for many HK listed China names, in our view.
* As we stated before, during major China market corrections stocks in the property, financial, and metal sectors tend to be more vulnerable; while F&B, utilities, expressways, exporters, and industrials tend to be more defensive.
* We do not see any significant impact of this market correction on China's real economy. We remain bullish on the fundamentals of the economy and on the medium-term outlook (10 month basis) of the China equity markets (both A share and H shares) despite the on-going short term correction.
* Given that almost all the catalysts for the A share market correction are domestic in nature, we do not think they should have a significant spill-over effect on markets in other countries. If it occurs, we consider it an over-reaction.