China Equity Markets: The past and the future

China Equity Markets: The past and the future

This Jan 2017 might be a good time to look back at the last year where China's stock market was going wild with extreme volatility and record trading volume.

The stock market plunge prompted Chinese regulators from Beijing to contain the panic and fear among investors. Among the tools used by regulators is to adjust interest rate, changing stock trading regulations, loosen margin credit to prop up the falling market and many more actions deemed as brute force. There is too much similarity in interpreting market information among investors. They are speculating heavily in the market by not using any fundamental basis. They are skeptical of all actions made by the regulators and regulators are in a tight situation in order to be impartial. Investors are extremely scared of further markets actions that might impact the value of their shares and there will be further wave of irrational purchase and sales of shares.

Regulators responded by using the most direct approach which is approving large funds or stimulus to buy up huge amount of shares in proportion to the average trading volume. Beijing regulators had exerted its influence and control over its entities under the supervision by buying all shares up till the panic is over and subsided. Fear can only be removed by explicitly ordering all institutions to stop selling and buy continuously until a new order is issued. There is no other better signaling move. Regulators in fact chose this path and managed to ease the fear which sparked a rally for the markets.

The unconventional forceful method of propping up the market, accompanied by the surge could mean further rise of more serious fall. It could go either way and market will be extremely brutal to speculators. Investors will never be able to fully comprehend the complexities of regulatory behavior and market starts to behave in other ways as we slowly understand the impact. Market is always forward looking and will reflect all interpretations of the collective investors.

Many market watchers have differing opinions as to the effectiveness of the control measure in terms of size and importance. However there is one specific action that will send a very clear signal to the market, which may well be the most widely covered methods for rescuing the markets. The action includes a meeting involving 21 leaders of China's largest brokerage firms with CSRC, the powerful market regulator. The outcome of the meeting was an official statement by all parties that they will collectively spend 120 billion yuan to stabilize all parts of the equity market by buying exchange floated funds tied to high grade blue chip shares that are trading on Shenzhen & Shanghai markets.

The firm had unanimously agreed to continue holding on all the stocks purchased in the open market with their internal funds until the stock index benchmark recovers to a comfortable level at 4,500 index points. Brokers are holding on to huge amount of shares that could be offloaded any time as soon as the opportunity arrives. Regulators have restricted the selling until at least the index reaches a level at 4,500 points. There is a big resistance level at 4,500 levels and no market observers could foresee or forecast the impact. This in essence acts as a similar call option that buyers must forgo when the purchase stocks when the index trades under 4,500. As the stock index closes in at 4,100 or much higher, there will be heavy selling by brokers who are cash-strapped and running out of capital at index level of 4,500. Investors who bought shares are providing a free of charge call option at 4,500. As prices trend higher, upside is capped and downside risk becomes more apparent.

Economic powerhouse

Economic powerhouse

How China became an economic powerhouse

Currently, China's economy boasts the world's highest GDP, above the USA. In fact, yes, the Chinese economy did overtake the States. That means it has a bigger economy than every Eurozone nation combined. Plus it's only likely to get bigger in the coming years. China's GDP Grows 6.7% currently.

So how did this happen? In this article, we present a timeline of the major events of the last 40 years that have seen China take over the financial world.

The Late 70s

Since October 1st 1949, China had been the world's largest communist state. Throughout this entire period, the economy had been strictly monitored and structured in accordance with government initiatives. 1978, however, was a year of huge economic reform, as the Central Committee increased the potential for market mechanics to affect the system, while planning a huge reduction in its control over the economy.

The first thing the rest of the world noticed was the sudden eagerness Chinese farmers had to trade with foreign food companies. For the first time, Chinese agricultural organisations were allowed to sell their surplus crops abroad.

Another key change came with the Duel Track System, also established that year. This created two prices for goods and services: one for State Owned Enterprises and a second for the private sector. So, while the SOEs would be offered lower prices, private companies would still be able to trade and grow.

The following year, the Law on Sino-Foreign Equity Joint Ventures was passed by the Committee, which officially allowed and encourage foreign companies to invest in the Chinese economy.

The 1980s

The People's Republic of China marked the new decade by becoming an official member of the International Monetary Fund and the World Bank. In order to support foreign investment, the Committee created four ‘economic zones' that would be specifically structured to attract capital from abroad. These zones were in Zhuhai, Xiamen, Shenzhen and Shantou.

Over the next decade, several huge reforms were brought in to inject life into the Chinese economy.

• Household Responsibility Reform: This allowed China's farmers to keep their can retain surpluses rather than give them back to the government.

• The 6th Five Year Plan: For the first time, a Five Year Plan had the growth of a market-based economy at its core.

• Open Areas: In 1984, the state began work on 14 cities and ‘open areas' for investment that would not be governed by the red tape of other areas of the country.

• General Principles of Civil Law: This provide providing the legal structure needed for a market economy.

The 1990s

China began the 90s by opening its first ever stock markets in Shanghai and Shenzhen. Though, midway through the decade, inflation rates threatened to derail the economy, the Committee acted swiftly, bringing in banking reforms that controlled lending, easing the state through the late 90s Asian economic downturn.

In fact China was in a position to help other nations in the continent during this period, including Thailand, offering over $4 billion worth of aid to its neighbours.

The 2000s

The new millennium saw China moving ever closer to becoming a free market state, with membership of the World Trade Organisation spurring a number of reforms such as the elimination of domestic price controls and agricultural subsidies. Also share markets opened to foreign investment and private property was protected by the constitution.

By the end of the 2000s, China had reached an important understanding with the United States, with a ten year co-operation deal on sustainability and increased market access.

Thank to these huge steps taken over the last four decades, China is now one of the world's most influential economic states.

How to do business in China

How to do business in China

If you are travelling to China to do business, either for the short or the long term, you will need to prepare yourself for the cultural differences between here and the west. Here we present some simple tips that will help you on your way to succeeding when you go to work in China.

Make strong connections

Business all over the globe is about making connections though, in China, this is particularly true. Trust is everything and, until you've gained the trust of the people with whom you want to do business, you won't get anywhere. Once you show that you are reliable, however, a Chinese business person will happily let you into their circle of connections. Often a single, strong influential connection will be all you need to make open the door to a successful business career. The best way to do this? Don't jump straight into business. Chinese business people like to make friends before talking about money. This will show them you are a long term operator and not just after a quick buck.

This is not a hard sell environment

While you might be used to high pressure business deals and meetings, that kind of thing does not wash in China. Here, influential business people will not respect you pressuring them for a quick decision but will prefer you to state your position honestly, openly and logically. That does not mean you have to be weak – in fact, you should make it clear at all times that you can walk away from the table. Yet trying to coerce them into giving you what you want as quickly as possible will not get you anywhere. Patience is essential.

Show respect to people on your side

In China there is a code of honour attached to how you do business. Key to this is treating all colleagues with the utmost respect. Therefore, publically questioning or criticising a member of your workforce or team is considered both rude and unprofessional. Tact and delicacy is very much the order of the day.

No is not always an option

The Chinese do not say no very easily. This does not mean, however, that they will say yes to everything. What passes for a positive answer in the west could, actually, be an indirect no in China. Learn the difference.

The Chinese do not say no very easily. This does not mean, however, that they will say yes to everything. What passes for a positive answer in the west could, actually, be an indirect no in China. Learn the difference.

When speaking in English, use short sentences

When you are dealing with a Chinese person who understands English, it is often easy to fall into the trap of thinking they will understand everything. Don't forget that they are speaking a foreign language and accommodating your inability to speak their language.

Credibility is everything

The Chinese will not respect you for ‘winging it'. They will expect you to be well prepared and to have studied the matter at hand in detail before your meeting. Presenting half-baked thoughts or just spitballing ideas will not go down well, so don't do it. Think hard before you open your mouth.

Document everything

When it comes to business, the Chinese like things mapped out clearly and concisely. Charts, diagrams and sketches will all be welcome as will plenty of plain text and straightforward wording. And, in line with the previous tip, do not ever present partial data, only hard facts.

Re-wire your western mind

Re-wire your western mind

Want to succeed in Chinese business? Then re-wire your western mind

One of the main roadblocks to people from a western business background who are looking to expand into the Chinese market is that, in many ways, the Chinese business person and the western business person will see things entirely differently. It is not a question of one side being right and one side being wrong. It is simply the case that people from different cultures are raised to see things differently and, in the case of China and, say America or the UK, they are raised to see things very differently.

It can take years of exposure to Chinese culture for a western business person to fully appreciate all the nuances and particularities that differentiate their thinking from that of their Chinese colleagues, partners or clients. This guide, however, can at least prepare you for what you are likely to find, with the key perceptive variances.

Example: Logic

In western society, logic is generally seen as a linear process. We accept A, therefore we accept B and that leads to C. One thing happens it causes another thing to happen from this we can deduce a conclusion. In other words, it's all about working out how one thing causes another thing. In Chinese thinking, things are quite different. Here, logic works in a spiral fashion. The thinking is more subtle and the connections between things are looser and less rigid or provable.

How does this affect business?

This reliance on a more fluid, less structured form of logical reasoning and critical thinking means a lot more time tends to be taken over decisions. Also, a powerful Chinese business partner or potential business partner may need the benefits of a deal explained several different ways, each at great length before being prepared to shake hands.

Example: Disagreements

In western culture, people are generally quite willing to disagree and express their disagreement in the surest and most certain terms. In fact, in many business environments, somebody who is prepared to speak up with a dissenting voice will actually be commended for their honesty, bravery and critical intelligence. In China, openly disagreeing is seen as an almost entirely negative action. If A Chinese person does not agree with you, they will express it in less straightforward terms, often in non-verbal communication.

How does this affect business?

Don't ever expect a straight no when you've made an offer. If the answer is negative, you will probably get a very roundabout, open-to-interpretation explanation that hints towards potential flaws in a proposal, yet never directly touches upon them. In fact, anything other than a very hearty ‘yes' is most probably a ‘no.'

Example: The individual Vs. the Group

In the west, there is a huge premium placed upon the rights, ideas and importance of the individual. If you live in the US, Canada, the UK or central Europe, chances are you have been raised with a keen sense of entitlement regarding your rights and ambitions as a person. In China, a greater focus is put upon what an individual can contribute to the group of which they are a member, often at the expense of individual freedom or short term happiness.

How does this affect business?

Personal autonomy and independence are not respected or granted easily in the Chinese corporate culture. Far more important is to be part of the group and carry out your job to the best of your ability in order to contribute to the group's goal. This can be tough when you have risen through western business, with its romanticism of the maverick attitude and out-of-the-box thinker, but it is crucial to how the Chinese get business done.