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Markets  |  February 20, 2013 10:18:10

M. Mobius: Rises and falls Chinese stock markets

The Chinese stock market last year resembled a roller coaster, to which investors with weaker stomachs could do pretty sick. It is true that according to many indicators, the performance last year of the Chinese market and disappointment with regard to the size of this market, however, his performances are not bad at all, so despite what the general public, I question the long-term growth potential of the Chinese stock market optimist. As once said by Sir John Templeton. "The period of maximum pessimism is the best period for purchases and times of maximum optimism appropriate moment to sales."

From the perspective of my team, the Chinese stock markets at the moment seems to be relatively cheap. A market based in Shanghai shows the average P / E 12 (value from mid-January of this year), the total valuation of shares, then at this moment is not far above its lows of 2008. We admit, however, that the situation may affect any profit declines local companies.

Retail investors market moves

In the early part of the last decade, the Chinese stock markets experienced a boom literally. Shanghai Composite Index (on which they are traded A and B shares) rose from 1,000 points in 2005 to 6,000 points in 2007.After correction experienced index at which pulled down with it a number of retail investors. Although part of the losses were gradually wiped, in December 2012, however, Shanghai Composite Index fell to four-year lows and now (mid-January) moves to 2300 points. Retail (individual) investors make up 80% of investors and the markets in Shanghai and Shenzhen. This is the reason why the sentiment of the population so much power.


The power of politicians

Sentiment population in the past time, fortunately slightly improved, that when Guo Shuqing, head of the Chinese regulatory authority, supported the idea of greater market access to foreign markets for investors.Chinese stock markets are now building a strong capital controls, which makes them inaccessible to foreign investors. Once the possibility of foreign investors expands, it opens the door for greater transparency and "straight" game.

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In the past, political action catalyst fluctuations Chinese markets. More than 90% of the population reads the same newspaper, so most of the announced reform measures and programs can trigger emotional avalanche that results in sales of shares. I believe, as the government will come up with new reform measures begin to Chinese investors once again returned to the markets. This trend has been observed for the foreign investors who are active in the markets in Hong Kong on A, B, and the so-called Red-chip stocks. The volume of foreign capital towards emerging markets in 2012 surpassed the 50 billion USD.


Increasing mobility

Our expectations are that as in China will lead to an increase in disposable income of the middle class, it could increase the amount of savings was being moved into investments. Many Chinese consumers benefited from the increase in the annual limit of 20%. In addition, there is also a process of industrialization, government support for investment in infrastructure and housing, as well as the expansion of social security, the development of the education and health system for immigrants seeking direction from the countryside to the cities.


The challenges for the new leader of China

It looks like the new generation of Chinese leaders continued to lead the country towards further growth potential and dramatic reforms. Xi Jinping and Li Kequiang, future Chinese president and prime minister officially take office in March this year. The two leaders expect a number of challenges, including the efforts of former and current members of the Party maintaining power over the running of the country.

Li Jinping revolution represents the generation of heirs who must prove his moral consistency to lead the nation without corruption and abuse of power. Has recently been revived in the idea of greater openness in the political and economic sphere, both will have Chinese policymakers, including those at regional levels, to prove the origin of their possessions. Xi Jinping its philosophy presented clearly in the Party Congress in November last year, when he said: We have every reason to be proud of. Proud but not satisfied.Within the Chinese Communist Party, there is still a lot of unsolved problems, especially those in the form of corruption, bribery, stealing the nation and the over-emphasis on formality and bureaucracy.

Xi Jinping also introduced a comprehensive reform program, together with a timetable and specific objectives that should be achieved by peaceful and pragmatic approach advocated already by the previous leader Deng Xiaoping.

New leaders also seek to increase the efficiency of decision-making processes. Implementation of the 12th China's Five-Year Plan (launched in 2011) is to encourage entrepreneurship and change the structure of China's economic growth with more emphasis on domestic demand. New leaders should also have a significant impact on Chinese interest rates, which occurred in the years 2010 - 2011 five times increased, if necessary, then there is enough room to stimulate the economy through a reduction in these rates.

Volatility, many investors considered a bad thing, it has the bright side, that along with it comes new opportunities. This year, China is likely to bring new challenges and volatility. In our view, however, the Chinese stock markets have growth potential, which we plan to attend.

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© Copyright 2012 Franklin Templeton Investments. All rights reserved.
The article was translated and reproduced with kind permission of Franklin Templeton Investments' Mark Mobius blog from


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M. Mobius: Vzestupy a pády čínských akciových trhů

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