From Anne Stevenson-Yang of JCap Research via FTAlphaville:
Amid the bloodletting on Friday that evaporated RMB 13 trn from China’s A-share market cap, one standout company gained 44%, the very IPO blamed for overwhelming the system in the first place with its demand for cash: Guotai Junan. This brokerage’s IPO was the market’s biggest since 2010, raising RMB 30 bln. It was heavily oversubscribed, and why not? The average return on IPOs in June has been 136%, with some companies’ prices rising 20-40 times in a matter of weeks. Beijing Baofeng Tech, for example, has been listed since March 25 and is trading at 42x its IPO price. The non-financial companies have been listing at a trailing P/E of 23, while the average P/E on the markets is much higher.
That rapid share appreciation tells you who is making money in the Chinese A-share market: those privileged enough to gain access to the IPO allotment and those who know in advance both real results and market tactics that listed companies and their major investors will deploy. These about-to-pop shares are such a reliable bet that the IPOs are oversubscribed 240x on average.
…While it can be argued that what has happened in China since 2009 is a kind of privatization and marketization, from the perspective of household investment, what has really happened is one after another fat pipe has been created to port family wealth into the pockets of insiders, not the State treasury. This seriously aggravates the State’s looming fiscal challenges and profoundly impacts the levels of household confidence and consumption. It is the nuclear fuel of China’s dangerous and fast-growing wealth gap.
The sucking sound you hear is the average person’s bank account being drawn off into the hands of the red elite. Stay tuned, but maintain a safe distance.
…Ultimately, market participants all understand that the A-share bubble has been engineered to distract the average person from sinking values and illiquidity in the property markets. The pools of cash owned by Chinese people are regularly redirected to the asset classes that the government needs to rise and that elites are tapped into, and it behooves the political elite to delay recognition for as long as possible of the drastic losses that are in those assets and would be proven beyond doubt if left to market forces. Thus we have the Saturday liquidity moves, with the only important question being, how long will it work? We can confidently measure the bubble’s future life in days, weeks, or even months but not in years. 2015 will not be a quiet year for domestic investors.
