Some of the smartest investors in China would love to sell their shares in Chinese companies. But for them, the country’s stock market has become the investment equivalent of a roach motel… they can check their money in, but can’t get their money out.
They’re not allowed to sell. And until the country’s government stops making the stock market its personal piggy bank, individual investors should stay away.
China’s stock market fell 7% on Monday, the first trading day of the new year, and dropped slightly yesterday. The release of data showing weakness in China’s manufacturing sector renewed concerns that China’s economy is slowing down. And the expected end of a ban on the sale of shares by insiders in China’s biggest companies – the major shareholders, corporate executives and directors of publicly traded companies – made investors think that a new wave of selling was about to come.
Until recently, investors couldn’t get enough of China. From June 2014 to June 2015, the Shanghai Composite Index rose by 150%. After years of underperformance, China’s stock market had come back into favour, thanks in part to low valuations. Also, government tightening of regulations on real estate investment – the preferred investment for many investors in China – pushed more people into the stock market.
In the space of a year, more than 40 million households in China opened new trading accounts – that’s 150,000 accounts per workday, or nearly 20,000 per hour. Leverage, or borrowed money, made it easier for speculators to push share prices up. Most new investors in the market had very little sense of what a stock even represented – and no experience with share prices falling.
The Shanghai market peaked on June 12, 2015. But then, concerned about the stock market overheating, the government tightened limits on borrowing money to buy stocks. Signs of a slowdown in the Chinese economy also spooked investors. Over the following month, Chinese shares fell 30%, and lost a total dollar value of $3.5 trillion, about as much as the annual economic output of Germany.
To help limit the crash they had created, the government itself started to buy shares and put in other measure to stop the fall. Also, China’s stock market regulator imposed a six-month ban on share sales by insiders in early July. This meant that major shareholders (people who own more than 5% of a company’s stock), corporate executives and directors couldn’t sell shares in listed companies for six months. The government hoped that this would prevent the sales of these holdings – estimated to be worth $185 billion – and help calm the markets.
(In most markets, insider buying and selling is a good indicator of how companies are doing. In general, when insiders buy, it means they think that the share price of their company is going up… and when a lot of them sell at the same time, it’s a bad sign.)
The measures worked – for a while. The Shanghai Composite climbed 25% from its August lows through late December. Then China’s stock market started 2016 with its worst-ever first-day performance.
With the most recent fall in China’s markets, the government is using the same playbook. Yesterday, Bloomberg reported, “China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signaled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter.”
The ban on insider sales is only one way the Chinese government is manipulating its stock markets. No one can know how many of those insiders would sell their shares – if they were allowed to. But we won’t know that for a while… just as we won’t know the real price of Chinese shares until the government stops playing in the market itself. Until that changes, you’ll have about as much control over your money as the insiders whose money is locked up in shares.