Wipe away Tears and Blood to Embrace the Bull Market

Caifu Magazine | by Caifu Global

Note from CAIFU: 

The article pointed out “Various unfavorable factors would emerge over the 2012-2013 period. These unfavorable factors will be like the fires of the phoenix, burning and fueling the Chinese stock market into a bright new round.”

In reality, the Chinese sluggish bear market reached the bottom at 1859 points on June, 2013. The stock market is now at a height of 3600 points.

2011 witnessed heavy losses for most stock investors. Long-lasting bear market may not be unfamiliar for these people that have been transacting in the stock market for long time, but most of them still can't conceal their helplessness and desperation. Except for the battleground filled with bloodshed, there is no other place more cruel than the financial market. People constantly ask when the long miserable night will end.

According to the statistics of China Securities Depository and Clearing Corporation Limited (CSDC), only about 5% accounts participated in the stock trading within a single week in December of 2011. Some media concluded that the stock investors of China that had suffered heavy losses opted to exit the stock market. In fact, the majority of stock investors were trapped in the stock market. The writer warned all his readers at the beginning of this year that they should exit the stock market regardless of whether they earned money or lost money. Yet in reality, almost no one exited because they were trapped in the stock market.

It isn't very difficult to predict the market trend of this year. One of the cardinal lines is the conflict between inflation and austerity. Tracing back to the root of inflation, both the imported inflation and the previous monetary easing are primary causes. In all eras of high inflation, People's Bank of China had to rein in liquidity. Since the stock market is based on sufficient supply of capital, the bull market won't appear when austerity is enforced.

If there is only the conflict between inflation and austerity, it would be easier to predict the turning point. Essentially, inflation makes all physical assets more valuable. Of course this includes stock investment, which own real assets in a disguised form. On the one hand, corporate stocks are becoming more and more valuable; on the other hand, contraction of liquidity is increasingly reducing the trading price of the stocks. This kind of bilateral inverse motion will form a turning point sooner or later. If no other turning point is involved, this turning point will be the beginning of the next round of the.

However, the fact is far from that simple because greater risks are waiting for us. Having accumulated for many years, these risks have become the sword of Damascus hanging above the stock market, threatening institutions that want to take a bull position. These are the bursting of the housing market bubble and reversal of capital flow.

The serious consequence of the real estate bursting will remind people of previous horrible experiences. After Japan's housing market bubble burst in 1990s, the Nikkei Stock Index dropped steeply from 38,000 points, and after 20 years to the present, the Stock index is still only around 8000 points. The consequence of the U.S.'s housing market bubble burst still remain fresh in our memory. Although China's economy is different from that of U.S. and Japan, either dramatic decline or slow landing of housing prices will have significant impact on the economy, not only because too many industries are related to the real estate industry, but also because the real estate industry is closely correlated with the banking sector.

The flow of international funds is closely related to the real estate industry and the stock market. The RMB appreciation that began in 2005 and the inflow of capital helped fuel the bull market of 2005-2007. Now, with the expectation of RMB depreciation, short-term capital outflows from the country could hardly be avoided, which has obvious impact on the stock market.

Since inflation is caused by both housing market bubble and inflow of foreign capital, credit squeeze is caused as a result. However, inflation won't disappear together with the drop of housing price or the outflow of foreign capital, which will make the situation even more complicated. It is inevitable that administrative measures will be taken in the future to make more detailed and thorough adjustment and control. From the perspective of macro economy, this will be the inevitable result, and also the future promise.

From the perspective of micro economy, people would almost unanimously denounce scale expansion and misappropriating. Both the implemented Growth Enterprises Market (GEM) and over-hyped Overseas Enterprises Sector are the factors that cause the stock market to suffer losses. However, few people mention the role played by Full Circulation. Actually, Full Circulation has permanently changed the gaming rules of the Chinese stock market. Because the circulation reform of state-owned stocks was followed by a round of booming bull market, many people didn't realize that Full Circulation will completely change the valuation system of China stock market.

“Becoming major shareholder by investing in stocks” was once regarded as a kind of foolish behavior. In fact, even before Full Circulation was launched, it was impossible to become the major shareholder by investing in stocks because over 70% state-owned stocks couldn't be circulated. At that time, instead of caring about how much one enterprise was worth, people only cared about the price of stock. Only under such circumstance could the stock of Yian Techonology Inc. be priced over 100 RMB. Now, after the implementation of Full Circulation, if one institutional investor want to hype the value of a company valued 1 billion RMB to 10 billion RMB, the shareholders would be very willing to sell the company to this institutional investor. If this comes true, they will thus become large shareholders. This means that the same game trick won't work anymore. This has the same effect as that by the crackdown on the institutional investor’s speculation in 2001. However, this time the impact is long lasting.

Not only that, under the previous game rules, the only way to make money in the stock market for both institutional and individual investors was for the stock price to go up. In the current era of Stock Index Futures and Margin Trading and Short Selling, short selling can also make money, which will completely change the model of the bull market. In other words, the booming bull market from 2005 to 2007 won't repeat again.

However, capital hates to be lonely. After reaping the high profits 100% of year-on-year growth, the restless capital would almost disdain other industries with annual profit rate of less than 10%. However, the cruel truth is that the stock market has turned into a meat grinder. From the end of 2007, stock investors could hardly make any decent harvest except for blood and tears.

Therefore, the surviving capital and new capital, as well as other outside capital without specific purpose hyped up almost everything except for stocks. They hyped up porcelain, calligraphy and painting, furniture, jade, stone and tea in a crazy manner that overshadowed the manner of the hyping up of tulips of the Netherlands. They even hyped up such articles for daily use which can neither be maintained in terms of value , of which the value can neither be maintained, nor be stored for long time such as ginger, garlic and mung bean. While it is correct to say that insufficient capital is available in the stock market, it is wrong to say that the public in China doesn’t have enough money.

People can provide 100 over even 10,000 reasons for not entering into stocks. However, despite the number of reasons available, currently investing in Blue Chip stocks won't be more ridiculous than hyping up the price of one ordinary stone to over RMB10 million. People don't invest in stocks only because stocks can't drive up prices just like stones and garlic. The stocks can provide huge supply that can't be afforded by private capital.

Investing in stocks is equivalent to owning the stock equity of enterprises, which is positive for the economy. Although most Chinese stock investors only care about the price difference instead of investment itself, capital nonetheless flows into enterprises and production service fields. Speculation, on the other hand, is of no real help for the economy, and will cause the capital to be withdrawn from the cycle of production and consumption. In the event of a food crisis, calligraphy and painting can't satisfy the people's hunger. Countless antiques in Qing Dynasty's Palace couldn't defend against the guns and cannons of the Eight-Power Allied Forces.

Gloomy future expectations, changing of game rules, together with the outflow of capital from the stock market, caused China’s stock market to be the least favorable industry of all during the recent 4 years. After speculating everything else, people find that the only thing that’s priced at low levels is the stock market. When China's stock investors are sighing helplessly, without anyone noticing, China’s stock market quietly becomes one of few markets with depressed value. The panicking factors that resulted in long-term depression of China’s stock market may not be as terrible as imagined.

Recently, both real estate developers and local government officials are all telling a so-called scary story, that as long as the housing market bursts, China's economy is doomed. Even Larry H.P. Lang follows this voice. Actually, China's tolerance capacity for a bursting of the housing bubble is much stronger than what these scary stories are telling. The current implementations by China’s government to suppress housing prices are meant to stop the housing market from heating up, and to prevent a dramatic drop in the future. If housing prices actually plunge, China's government will change its policy. On this occasion, the stock market, which is at a bottom low prices level, can recover more easily than housing price at high price level.

As for the prediction that foreign capital will be withdrawn and the expectation of RMB going from appreciation to depreciation, the impact after the short term shock is more psychological. Foreign capital withdrawal will certainly lead to monetary policy easing. The continuing of RMB depreciation together with rising inflation will increase the value of physical assets, including stocks.

The factor of unfavorable news caused by game rules change has been releasing. After shareholders' pressure of reducing their holding of shares, the remaining industry capital stands to maintain or push up the stock price. Although institutional investors don't want to become large shareholders anymore, the real large shareholders would not want to see their own company’s stock remaining at a sluggish and depressed state.

As the saying goes: Bear market won't end until bull positions are all terminated. Nobody can precisely predict where the stock market will be pushed by the successive risks and or how long the gloomy days will last. However, the force unconsciously ebbs and flows. While it seems hopeless, hope may not be far away from us.

Recently Central Huijin Investment Ltd. announced that it will increase its holding of the shares of large-scale state-own banks, this is a positive signal. National policy does not want to see the stock market keep falling, and the share price of many of these state-owned banks are very low. In the long run, buying shares of banks with a price-earnings ratio of just six times won't carry too much risk even if the housing bubble burst factor is taken into account.

But this does not mean that the stock market will bottom out soon. This is the so-called difference between the thinking of government and public market. Institutional investors and individual investors are always adversaries. When combined with government policies, together they constitute the three major elements that compete against each other. When stock price remains at a low level, the policy factors would launch favorable policies to prevent further drop of stock price. This will enhance individual investors' confidence and thus make it more difficult for institutional investors to buy in. And the more unlikely it is that individual investors will desperately sell their shares, the more effort institutional investors will put into suppressing the stock index. On the other hand, when the whole market rises, policies will be placed on the stock market to suppress the stock market from rising, making it more difficult for institutional investors to sell shares. Therefore, in the eyes of institutions, the actions of the government are always an annoyance. It is no wonder there are people advocating to eliminate all government interventions.

As for the future prospect, one thing is still not available. Specifically, when all the negative news really come together, and when a group of economists and scholars recklessly predict the slump of the stock market, just like in 2005 when some scholars predicted that China's stock market would plunge to 600 points. Don't hate such unfavorable predictions too much. Instead, we should gladly see them as sounds of will emerge attack.

Various unfavorable factors will emerge over the 2012-2013 period. These unfavorable factors like the fires of the phoenix, burning and fueling the Chinese stock market into a bright new round. Although this new round of bull market will emerge in a way different from that of 2005 or won't be noticed until it has passed. But after all, it is still a bull market.