The Long Bull Market?

Many believe China is going through a prolong bull market from 2005 to 2010. Those who believed in, stuck with the China Story and had bought shares since 2005 had made over 110% annual return since 2005. For those of you who can read Chinese, Professor Ching had written many books on the subject.


"Five years of great prosperity"


"Long Bull Market. Change Trading Style"


"Value Investing"


"Long Term Buy. Do Not Sell."


"Warning! Beware of The Stock Market."

These books can only be found in China's bookstore. I mention Profession Ching and his books because I wish to show our readers how Chinese People view their country and economy. You will also notice how the Chinese' investment approaches differ from the west.

Professor Ching's blog is http://840924.blog.sohu.com/ (in Chinese only).

Basically Professor Ching and his followers believe that they are value and qualitative investors similar to Warren Buffett. Their strategy is to pick big companies with good future earnings like Bank, Energy, Property and Financial stocks. As the title of one of his book suggests, once they buy they will hold onto them for a long time. I do not totally agree with Professor Ching. For example I do not believe that buying shares with PE ratio of over 50 is buying value. Also Professor Ching recently contradicts his 'Buy and Hold' theory and told his followers to sell in June 2008 before the Chinese Olympic and then buy back in 2009.

However Professor Ching has a lot to say about the China Story and its economy. I will talk about this in my other article "The China Story" but now I wish to briefly mention the strange behavior of the Chinese Stock Market and you might find that the market behavior resemble Professor Ching's investment theory.

To remind our readers, the Chinese stock market started its bull run in the middle of June 2005. The Shanghai SSE Composite index was 1000. By end of 2006 the index has more than doubled it value to above 2000. By November 2007, the index tripled it value again to reach a peak of 6000.


I wish to highlight that the Chinese Stock market price movement is somehow different than the Dow Jones Industrial index for example. Firstly, one will notice that the market index can keep on doubling itself year on year without any corrections. In January 2007 there was a market correction and Chinese people were queuing in the morning to buy the shares at a lower price. Secondly you will find that Chinese people keep pouring money into shares with exceptionally high PE ratio. At first I felt that this is due to their immaturity with trading. However after reading Professor's Ching's books I wonder if they know something we don't.

The January 2007 correction was triggered by the Chinese government who was worried that the stock market was rising too rapidly. Hence they announced that they will raise the stock transaction levy. After the market fell, the government denied the announcement to prevent a further possible market crash. Chinese people were very angry at the government and went to the government office to complain. One can see that the Chinese government is not as mature in handling this kind of matters.

In July 2007, Chinese stocks listed in China and Hong Kong had another major correction trigger by the sub prime issue. Once again, in China people queue up in the morning to buy shares at a lower price. And in Hong Kong there was a rumor about the 'Straight Through Train' which basically means the Chinese government will allow its people to invest directly in Hong Kong stock market. This had pushed the Hang Seng index from 22000 points to its peak of 33000 in November 2007, approximately 50% in four months. It is rumored that the mainland Chinese people had sent their money via the black market channel to Hong Kong and bought shares. One can again feel that the mainland Chinese people behave very differently in their trading methodology when compare with investors in the West who tend to be more cautious.

The November market fall proves to be the start of a down trend. However many still believes that China stocks will keep rising. The reasons include - 1. Rising Yuan, 2. Increase GDP, 3. Or let's put it this way, China is an emerging market with very little and if it was to become the U.S then the existing companies will be doing much more business and worth much more in the future. I will cover this in my article 'The China Story'.

Finally what is to become of the 5 years of great prosperity and the long bull market? It is 2008 and we are still 2 years away from the end. Right? To analyse this question let's look at the share price performance of China Life Insurance which is listed in U.S, Hong Kong and mainland China. (Note I am not trying to answer the question because I don't claim to know the answer but I will provide knowledge and insights for the readers to come up with their own answers. This is my style you will see in pretty much all my articles. )

We can look at the share price of China Life Insurance for our purpose because other Chinese share price pretty much follows the same pattern. The IPO price of China Life Insurance in 2003/12/18 was $HK3.59. Peak price in November 2009 is $HK53. Current price is $HK28.

From a technical analysis which your author claims to be an expert, one can see that in January 2007 the share price appears overbought. One can use the longer term moving average as the fair price. The share price fall back onto the moving average's fair price and then continue its bull run. You can see the same kind of action in July 2007. Because of this kind of movements many including Professor Ching had reaffirmed their view on the Long Bull Run theory. In November 2007, again the share price is overbought but this time the share price has broken through the moving average. We are in a Bear Market. Despite the price had fallen 50%. The China Story is still intact i.e. GDP will continue to rise, the Yuan will rise again the U.S dollar by another 8% and company will still report strong earnings. Therefore there is still a possibility that the price can continue to sour this year.

The flip side of the story is inflation in China is at a record high and Chinese government is pulling the reign to prevent further inflation. The world is at the start of a recession. The global market sentiment is bad. So PE ratio investors willing to accept are lower.

Where are institutions and businesses putting their money? In the recent HSBC annual general meeting Stephen Green says they will continue to invest in emerging markets like China, India, Russia and Brazil. In think in the longer run this is a good strategy because no matter what the market sentiment is at the moment. These emerging markets are still growing very rapidly. Earning will continue to improve rapidly. Unless company earnings fall into a negative feedback cycle as explain in George Soros' "Alchemy of Finance". In a way a lot of Chinese companies' earnings in 2007 came from share price appreciation from Chinese stocks they own. If the stock market do well then their earnings improve which also lead to higher share price of the companies and the cycle continues. However the sub prime issue had triggered a negative cycle. The market is not doing well and so their earnings will be weak, etc, etc.