Risks in investing in China's volatile bourse but bigger risk for investors is to ignore it altogether
I got my first glimpse of the Chinese stock market when I visited Shanghai for the first time in 1991, a time when the bourse was still very much in its infancy.
Memories of the Tiananmen Square protests two years earlier, when students challenged the Chinese government's authority, were still fresh in my mind and I was curious to find out how the country's experiment with the stock market was panning out.
It seemed bizarre that a communist country, where prices were tightly controlled by the state, should allow a freewheeling stock market to exist where prices would be dictated by supply and demand.
When I arrived at the office of Shanghai's then biggest securities house, Shenyin Securities, in the old French quarter, what greeted me was a shabby shopfront with a huge crowd packed so solid that there was hardly any breathing room, let alone the peace of mind to make an informed investment decision. It would appear from the chaotic scene that buying stocks was viewed by the crowd as a sure way to get rich, with people shoving their way to place their orders with harried staff seated behind the glass window that separated them from the huddled masses.
Indeed, it was a scene I had never seen in other stock markets, even at the height of a bull run. This left me in no doubt whatsoever that in time to come, the China market would surely become one of the world's largest, given its investors' enormous appetite for taking risks.
Yet, ask me 26 years ago if I could have envisaged the way this market had developed and I would still have been astounded by the tremendous progress made.
The shabby shopfront I visited in Shanghai 26 years ago is no longer there, replaced by a glitzy high-rise office building. Neither does an investor have to push and shove to place a stock order. All he has to do now is to tap his order via his mobile phone or a laptop.
In just one generation, China had leapfrogged to the forefront of the world's financial markets. Its A-share market is valued at around US$7 trillion (S$9.7 trillion) and lists over 3,000 firms. Shanghai is also Asia's most traded stock market with about US$20 billion worth of shares changing hands daily - more than 25 times the average turnover on our bourse. In Hong Kong, which marked the 20th anniversary of its transfer from Britain to China last weekend, mainland firms make up almost two-thirds of its stock market in value terms. Such firms accounted for 90 per cent of the funds raised from initial public offerings in the city for the past five years.
Given the manner in which China's economy is growing, the Chinese stock market can only get bigger. Now largely confined to domestic investors due to strict capital controls, its door has yawned a little wider in the past couple of years, with the so-called Shanghai and Shenzhen Connect hooking up the two mainland bourses with Hong Kong. This linkage allows for up to US$2 billion of trades to pass in either direction every day and covers more than 1,700 mainland counters.
And in a move likely to fuel even more interest in China's bourse, from next year Morgan Stanley Capital International (MSCI) - one of the world's largest compilers of stock indexes - will be adding 222 China A-shares to its benchmark emerging markets index. Many investors measure the performance of managers running hedge funds and unit trusts against the MSCI indexes, so the inclusion will put pressure on them to buy China stocks to be added to the index.
In Singapore, we have a host of mainland firms, known as S-chips, listed on our bourse, but the accounting scandals that afflicted a couple of them in the aftermath of the global financial crisis 10 years ago have made some of us leery of investing. Even so, the influence of China on the local stock market cannot be dismissed out of hand. Some of the biggest component stocks on the Straits Times Index - these include the three local lenders, the Jardines companies and major property developers like CapitaLand - now get a big chunk of their business from China.
Therefore, it does not matter even if you are the dullest and most cautious investor imaginable with nothing more than a couple of blue chips in your kitty. We will end up playing the China stock market one way or another whether we like it or not - and what a ride this may turn out to be.
As far back as 10 years ago, investors were already beginning to feel the weight China now tosses about in the global financial arena, starting with the 8.8 per cent plunge in Shanghai in February 2007 that wreaked havoc worldwide, causing even Wall Street to plummet 416 points.
The phenomenal growth of the Chinese stock market has been accompanied by the equally impressive technological changes that have transformed the lives of ordinary Chinese in areas such as banking, transport and retail.
What is more, investors struck gold when they lay early bets on mainland companies such as Tencent Holdings and Alibaba that are spearheading these changes.
Still, the enormity of these changes had also completely slipped by me, even though I have been a regular visitor to China.
That was until January this year when I found out I was the only diner in an upmarket restaurant in Shanghai who still had to resort to getting the waiter to take my order. All the others had ordered and paid for their food via their phones.
That incident made me feel technologically backward. It also marked a big reversal from my first trip when I could claim that I had come from a more advanced civilisation, since even basic electronic goods such as TV sets and fridges were still a rarity in many Chinese homes at that time.
It convinces me that while there is no shortage of epoch-making events weighing on the financial markets right now, such as the United States taking a step backward on free trade by ripping up global agreements, the most important changes that matter to investors are taking place right now in China.
Not that savvy investors are ignoring what is going on there.
I have noticed that to plug the gaps in their investment portfolios, some of my friends have ventured outside the local bourse to pick up mainland-listed shares traded in Hong Kong and New York as well as those in Shenzhen and Shanghai via the stock connect programme.
Trading in overseas markets such as China is now a breeze for them as brokerages such as Phillip Securities and OCBC Securities offer a wide variety of markets online via their mobiles or laptops.
For those who do not track stocks on a regular basis, another way to get exposure is to buy into an index fund tracking the FTSE China A50 Index, which is made up of the top 50 A-shares listed on the Shanghai and Shenzhen bourses. There are a couple of them listed in Hong Kong.
Chinese stocks have tripled in value in the past 20 years and my gut feel is that they will continue to appreciate as long as China stays on the growth trajectory.
Sure, there are risks in investing in China's volatile stock market but the bigger risk for investors may be to ignore it altogether.
A version of this article appeared in the print edition of The Sunday Times on July 09, 2017, with the headline 'Stock market: Ascent of the Dragon'. Print Edition | Subscribe
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