China Stocks World’s Worst Losing $748 Billion on Slump

July 31 (Bloomberg) -- Jonathan Garner, Hong Kong-based chief Asia and emerging-market strategist at Morgan Stanley, talks about the economic outlooks for China and Japan, and his investment strategy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Four years after China’s growth helped lead the global economy out of a recession and won the admiration of luminaries from billionaire George Soros to Nobel laureate Joseph Stiglitz, the nation’s stock market has lost more money for investors than any other in the world.

The Shanghai Composite Index (SHCOMP), which doubled in 10 months through August 2009 as the government poured $652 billion of stimulus into building roads, railways and housing, has tumbled 43 percent from its high, destroying $748 billion in market value. Only Greece’s ASE Index (ASE) has fallen more in percentage terms. The Standard & Poor’s 500 Index, the benchmark gauge of American equity, erased all of the losses from the worst recession since the Great Depression and has gained 68 percent since the China peak, reaching a record this month.

China looked unbeatable in 2009, surpassing Germany as the world’s third-largest economy and growing 6 percent in the first quarter while the U.S. shrank 4 percent. Templeton Emerging Markets Group Executive Chairman Mark Mobius, who oversees about $53 billion, said in July 2009 that China’s stock market could be larger than America’s in three years. Now, China is poised for the weakest expansion since 1990 as the government orders more than 1,400 companies to close factories.

Photographer: Qilai Shen/Bloomberg

Images of pedestrians are reflected on the glass doors of a securities exchange in Shanghai. China’s stock market swings have whipsawed investors for at least two decades. Close

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Photographer: Qilai Shen/Bloomberg

Images of pedestrians are reflected on the glass doors of a securities exchange in Shanghai. China’s stock market swings have whipsawed investors for at least two decades.

“The Beijing consensus as endorsed by some western observers as an alternative to the market economy is indeed a sham,” said Hao Hong, the Hong Kong-based head of China research at Bank of Communications Ltd., whose forecasts for stock losses have proved prescient. “Now we are all paying for it.”

Soros Endorsement

While the country contributed most to the global economy’s rebound from the 2008 financial crisis, growth is slowing as the Communist Party reins in an unprecedented $1.6 trillion lending boom in 2009 that helped send home prices to all-time highs and left local governments with record liabilities. Premier Li Keqiang is trying to transform China, where per-capita incomes are 88 percent lower than in the U.S., into a consumer-led economy from an exporter reliant on a managed currency.

Chinese companies dropped out of the ranks of the world’s 10 biggest by market value for the first time since 2006 last month. They claimed five of the top spots when Soros, the billionaire former hedge fund manager, and Stiglitz, who won the Nobel prize for economics in 2001, endorsed the nation’s economic policies in 2009. Soros declined to comment. Stiglitz didn’t reply to an e-mail and a phone call seeking comment.

‘Dead Animal’

The country’s stock market is like a “dead animal,” Carter Worth, the New York-based chief market technician at Oppenheimer & Co. who predicted the end of the Shanghai Composite’s rally as it peaked on Aug. 4, 2009, said by phone on July 23. While the index doesn’t have the same downside as four years ago, the likelihood of gains is low, Worth said.

For all of its destruction of wealth, the China bear market is dwarfed by the Great Crash when the Dow Jones Industrial Average declined 89 percent from a peak in 1929 to a low point in 1932, according to data compiled by Bloomberg. More recently, Japan’s equity market as reflected in the Nikkei 225 Stock Average, lost 63 percent of its value between 2000 and 2003.

The Shanghai Composite, comprised of mainland-listed shares restricted to local investors and qualified foreign institutions, rose 0.2 percent to 1,993.80 today, paring its 2013 drop to 12 percent, after the ruling Politburo pledged to stabilize growth while pressing on with economic reforms.

Relative Value

PetroChina Co. (601857), which was the world’s largest company by market value as recently as March 2010, has declined 11 percent this year through yesterday, and the Beijing-based energy producer is now ranked 10th at about $238 billion.

The MSCI China Index of stocks available to international money managers has lost 9.4 percent in 2013. Greece’s ASE Index, which has a market value of $59 billion, has dropped 4.5 percent, bringing its slump since August 2009 to 64 percent.

The S&P 500 advanced 18 percent since the end of December. The gauge added $6.4 trillion of market value during the past four years as companies from Johnson & Johnson (JNJ) to Chevron Corp. climbed to records.

The Shanghai measure is valued at 10.7 times reported earnings, down from 29 times at the peak in 2009. The index, which traded at a 59 percent premium versus the S&P 500 four years ago, is now 34 percent cheaper, the biggest discount since Bloomberg began compiling the weekly data in 1997.

Cayne’s Motorcycle

“Sentiment from China can go from one extreme to the other,” Gigi Chan, a Singapore-based money manager at Threadneedle Asset Management, which oversees about $111 billion, said by phone on July 25. “Investors were very excited, extrapolating the high growth rates quite far out into the future. It’s turned out not to be the case.”

China’s stock market swings have whipsawed investors for at least two decades. Merrill Lynch & Co. and Bear Stearns Cos. were among the first U.S. securities firms to open Shanghai offices in 1993 as the benchmark index surged to an all-time high in February of that year.

James Cayne, Bear Stearns’s chief executive officer, kept a red motorbike built by Ek Chor China Motorcycle Co. in his office after helping the company list shares in New York. By December 1994, both the Shanghai Composite and Ek Chor had lost about half their value.

The nation’s equities are “not for the faint-hearted,” Wellian Wiranto, an investment strategist at the wealth-management unit of Barclays Plc, which oversees about $217 billion worldwide, said by phone from Singapore on July 25.

Wrist Cutting

Mobius says he’s still bullish on Chinese stocks as the economy expands at a quicker pace than most major countries. While Goldman Sachs Group Inc., Barclays and China International Capital Corp. reduced their 2013 growth forecasts to 7.4 percent -- the slowest annual rate since 1990 -- that’s still four times faster than the 1.8 percent median estimate for the U.S. among 79 economists surveyed by Bloomberg.

“The time frame may be a little longer, but at the end of the day I believe China’s stock market will surpass that of the U.S.,” Mobius said in an interview in Bangkok on July 29. “We continue to put more in China.”

Premier Li has signaled he will tolerate slower growth to shift the economy away from the investment-led stimulus that sparked the 2009 recovery, to a more sustainable model based on services and consumer demand. Transforming the economy is a “self-imposed revolution” that will “feel like cutting one’s own wrist,” Li said at a March 17 press conference.

Fisher Optimistic

Long-term investors say the country of 1.3 billion people is worth the wait as its economy will eventually overtake the U.S. as the world’s largest. That may happen by 2027, Jim O’Neill, the former Goldman Sachs economist who coined the term BRIC in 2001 to describe Brazil, Russia, India and China, said in an interview yesterday.

China accounted for about 37 percent of the world economy’s growth from 2006 to 2012, according to the Conference Board, a New York-based research group. Revised data released by China’s statistics bureau in January 2009 showed the economy overtook Germany’s in 2007.

“Most of the world would love to have China’s growth rate when it is on the low end,” Ken Fisher, the billionaire chief executive officer of Woodside, California-based Fisher Investments, wrote in a July 26 e-mail. “We are optimistic on China.”

Industry Performance

In the past 20 years, foreigners earned less than 1.5 percent annually investing in Chinese stocks, a third of what they would have made owning U.S. Treasury bills.

The MSCI China index gained about 29 percent since July 1993, including dividends. That compares with a 456 percent return in the S&P 500, 326 percent in the MSCI Emerging Markets Index and 86 percent from Treasuries. The China gauge has advanced 321 percent in the past 10 years, versus 110 percent for the S&P 500.

The country’s new model is leaving behind companies with the biggest weightings in the Shanghai Composite. Measures (SHSZ300) of commodity producers, utilities and industrial companies have plunged more than 45 percent since Aug. 4, 2009. The industries account for almost half of the index, according to data compiled by Bloomberg.

China State Construction Engineering Corp. (601668), the nation’s biggest housing contractor, has tumbled 24 percent since its initial public offering in July 2009. Investors submitted bids worth 1.85 trillion yuan ($302 billion) in the stock sale, more than the entire market capitalization of Norway at the time.

Stock Scarcity

Shares that rallied during the past four years in the health-care, consumer, and technology industries represent about 19 percent of Shanghai Composite.

A shortage of stocks that stand to benefit from the government’s new focus on services has made them expensive, according to Goldman Sachs’s chief China strategist Helen Zhu. A gauge of health-care companies, including Beijing Tongrentang Co. (600085), traded at 32 times reported earnings last week, almost three times more expensive than the Shanghai measure, data compiled by Bloomberg show.

“There is a scarcity of choice,” Goldman’s Zhu said in a July 23 interview in Hong Kong.

The retreat in stocks is hampering government efforts to strengthen the economy as companies get shut out of the IPO market and local investors shift money from equities to speculative real estate investments and lightly-regulated wealth-management products.

Cash Squeeze

China’s securities regulator has banned IPOs since October as it seeks to avoid a flood of new shares weighing on the market while drafting new rules to strengthen the quality of listed businesses. More than 700 companies are waiting to raise funds, including Shaanxi Coal & Chemical Industry Group Co. and China Postal Express & Logistics Co., according to data compiled by Bloomberg.

The delay has caused a “cash squeeze” for some businesses, Gavin Ni, the founder and chief executive officer of Zero2IPO Group, which manages $500 million of venture capital, said in an interview in New York on July 26. “Companies have to get in the long waiting line.”

Stock accounts containing funds have dropped by about 2.7 million from their high in June 2011 to 54.5 million, according to regulatory data compiled by Bloomberg. About 116 million accounts are empty or frozen.

Ponzi Scheme

Money has poured into real estate, prompting Wang Shi, the chairman of China Vanke Co., the nation’s biggest property developer, to say in June that the housing market faces a bubble that could be “dangerous” if sustained. New home prices in Beijing, Shanghai and the southern city of Guangzhou jumped more than 11 percent in June from a year earlier, the most since at least January 2011, government data show.

Wealth-management products, which invest in everything from money markets to stocks and local-government loans, surged eightfold since 2009 to 8.2 trillion yuan at the end of March, according to government data. CSRC Chairman Xiao Gang likened the investments to a Ponzi scheme in an October commentary.

Policy makers started a nationwide audit of government debt this week to investigate threats to the financial system from the record credit boom that helped finance the 2008 stimulus plan. The central government ordered 1,400 companies in 19 industries from steel to cement and paper to cut excess capacity on July 25.

“Virtually every macroeconomic analysis shows that Chinese growth must moderate,” Kenneth Rogoff, an economics professor at Harvard University and former official at the International Monetary Fund and Federal Reserve, wrote in a July 26 e-mail.

Weaker Profits

China’s growth slowed for a second straight quarter to 7.5 percent in the three months ended June, extending the longest streak of expansion below 8 percent in at least two decades.

Exports fell 3.1 percent in June from a year earlier, the most since the financial crisis, while industrial profit growth slowed to 6.3 percent from 15.5 percent in May. Manufacturing contracted in July, according to a preliminary survey of purchasing managers compiled by HSBC Holdings Plc.

“The economy isn’t in great shape,” Wang Sheng, the chief strategist at Shanghai-based Shenyin & Wanguo Securities Co., the firm that warned clients of a “bubble” in Chinese stocks in August 2009, said by phone on July 26. “The transformation faces lots of uncertainty and investors have yet to fully realize its pain.”

To contact the reporters on this story: Richard Frost in Hong Kong at rfrost4@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

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