China Stock Market Regains Ground After Crash But Jitters Remain

Stocks crashing image in China after Japan - 1 - 2011
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After so much unbridled enthusiasm in Hollywood for all things China in recent months, the country's recent equity market crash and subsequent recovery is a reminder that China is still a developing market.

China's stock market crash last week and somewhat rocky road to recovery since then has investors fearful about too much volatility, with entertainment stocks bouncing around just like the best of them a time of uncertainty.

At the same time, the government's response of intervening in the equity market has raised questions whether much-needed economic reforms will happen in the world's second largest economy, a framework needed for more Hollywood-China deals because it will make China more accessible.

While Chinese entertainment stocks have recovered much ground lost, they are still not looking like major buyers in the overseas market right now, especially since the government tightened the screws on capital issues.

Chinese entertainment stocks -- the main titles are listed in New York, Hong Kong, Shanghai and Shenzhen -- have had varying fortunes since the stock market collapse.

New York-listed Alibaba, the e-commerce giant with major Hollywood ambitions, has recovered to where it is more or less in line with where it was in April, while its Hong Kong unit Alibaba Pictures is strongly ahead on the start of the year, but well off the highs of April. It closed on Thursday up five percent, a sign of the volatility in the market. While Alibaba will still be looking for targets, as its war chest is still cash-rich, the timing might not be great until the market correction settles down and there is a clearer idea of where we are going.


And what of Wanda, the real estate company headed by China's richest man Wang Jianlin, who is often touted alongside Alibaba founder Jack Ma as a contender for buying a Hollywood studio.

Wanda Cinema Line stock has struggled since the crash, and ended trade yesterday down 9.93 percent.

Trading in private production company Huayi Brothers, which has pacted with STX on production and distribution, was suspended along with many other smaller stocks at the height of the collapse to stop serious losses amid the slide. Since trading resumed in many small caps in recent days, Huayi has edged back and is now around where it was in April.

DMG Entertainment and Media traded throughout the crash and stayed stable, although it has come down a bit in the last few days. It closed trade yesterday up 1.8 percent.

Local media also focused on some of the hits that celebrities were taking.

Chinese actress Vickie Zhao saw her investment in Hong Kong-listed Alibaba Pictures fall from $870 million to $230 million in three months, the state news agency Xinhua reported.

Presumably she has recouped some of those losses, as the share has recovered in recent days, and ended trade up 5 percent on Thursday (Jul. 16).

Local media also reported that actress Fan Bingbing, who played Blink in X-Men: Days of Future Past and was in the Chinese version of Iron Man 3, had lost $19 million off her stock portfolio, while it also said that Memoirs of a Geisha star Zhang Ziyi had taken a bath in the correction.

"It could indicate that government is shifting positions to prioritize growth over reform, and also underscores the underlying issue of moral hazard in China's capital markets," the rating agency Fitch said in a report.

The Shanghai Composite closed at just above 4,000 points yesterday, finding resistance around the level at which the ruling Communist Party said back in April was the start of the bull run.

Since those heady days, the market surged over 80 percent, then a bubble appeared to burst, and it lost trillions in value, only for the government to step in with various life-saving interventions.

The government banned major stockholders from selling stakes in listed companies and allowed banks to roll over loans backed by shares, as well as cutting interest rates, suspending IPOs, and requiring brokerages to buy stocks, backed by cash from the central bank.

The Chinese market is divided into "A-shares" which only domestic Chinese investors can buy in order to protect local companies from outside influences, while H-shares can be bought through the Hong Kong market.

At least 90 percent of the A-share market is made up of retail investors, and two thirds of China's new legion of investors have not finished secondary school. They have been driven into the stock market to invest because there are relatively few genuine outlets in which to invest in China -- bank deposits yield around two percent per year, and the bursting of the property bubble has made the real estate market an unattractive option.

At the time the slide started, around 10 per cent of Chinese households were invested, after investors opened over 38 million new accounts – at one point, new accounts were opening at the rate of three million per week.

It looks like most of this was borrowed money. By end-June some 2.08 trillion yuan ($330 billion) worth of borrowed funds was invested on the Shanghai and Shenzhen markets, which put margin lending at 20 percent of the total market cap, compared to around 2.5 percent in the United States.

An April 21 commentary on the market in the People's Daily newspaper, the official outlet of the Communist Party, urged investors to get into the market, and nixed fears of a bubble because, the commentator said, A-shares were great Chinese companies, "not tulips or Bitcoin".

"If A-shares are seen as the carrier of the Chinese dream, then it has enormous investment opportunities," it said as the Shanghai Composite hit the aforementioned 4,000-point level. This, it enthused, was only the start of a bull run.

Many investors appear to have read the urgings of the Communist Party's main organ as clear investment advice, and interpreted the tone as saying the government would intervene if things got difficult.

News this week that China's gross domestic product (GDP) rose seven percent year on year in the first quarter had little impact on the markets, but it did feed into widely held belief that the real economic impact of equity market volatility will be minimal.

In the end they did, and the government stepped in to protect the investors. Sean Yokota, head of Asia strategy at the Nordic corporate bank SEB said the financial system and the real economy seem stable.

In order for the Chinese market to really function like a genuine market, the government needs to stick to the reform process and open up the capital account.


"Now, this is still not open to private institutions like real money and hedge funds who perform the bulk of the flows but it shows the continued direction of the government to liberalize the financial market and open the capital account. The stock market has not derailed the reform process," he said.

Wang Tao's team at UBS expects stock market volatility to lead to a less strong financial services performance in the second half.

"We see limited impact from the recent stock market turmoil on China's financial system stability, given the dominance of banks in the system and their small exposure to the stock market," she said.

UBS believes any negative wealth effect on household and consumption should also be limited, given equity's relatively low share of total household wealth (12 percent at the peak of the stock market rally, up from 7 percent at end 2013), and given how quickly these gains were made and how much of still remains after the correction.

"However, with new IPOs currently suspended and equity market activity likely to be more subdued in the second half, China's financial sector contribution to GDP growth may be lowered by up to 0.5 percentage points in the second half," she wrote.

Rating agency Fitch said the sharp fall in stock prices and the authorities' reaction showed the market was relatively underdeveloped.