When I was starting out in investing, emerging markets were all the rage. The Asian Tigers were where the money was to be made, with double-digit growth rates on the cards. But much of it was on the back of manipulated markets and fixed exchange rates, with interest rates not accurately reflecting the true cost of capital.
Of course, it all ended with the inevitable collapse, but do we see anything similar today? Let me offer a few thoughts about China
The Chinese stock market has been in turmoil again over the past couple of weeks, with a fall of more than 5% last Friday when it was announced that regulators were investigating the countrys top brokers and this is a regulatory regime that was ordering state-owned firms to buy shares earlier this year to try to prop up the market.
Buy into the rally?
Weve seen a rally in the past couple of months, but despite that the Shanghai Composite index is still down 33% since its peak on 12 June, to 3,537 points today. But does that make Chinese stocks good value now? The problem is, we have no way of knowing. Were looking at a manipulated stock market, regulated by a government that finds openness and freedom of information anathema to its political ideology. If youre happy enough with that setup to trust your own money to them, well, you deserve everything thats coming to you.
Theres been a modest recovery this week on the back of rumours that the dictators in Beijing are about to launch measures to prop up the countrys bursting property bubble but thats even more manipulation. The property market in China has become horribly overheated in the past couple of years, meaning that banks have lent vast sums of money (often under government orders) that are now backed by falling asset values.
Do you remember the sub-prime mortgage crisis that triggered the crash that nearly killed Western banking? Well, the bigger such a thing gets the harder it will fall, and manipulation of the property market is not going to solve the crisis. And I really can see further pain ahead. Banks heavily exposed to China? No thanks!
Dont forget that you have no regulatory comeback should you buy into a manipulated Chinese stock market the authorities dont even care what happens to their own private investors, let alone foreigners. So what about investing in Chinese companies that also have UK listings in order to get yourself a bit of regulatory protection?
Well, the bulk of the dual-listed Chinese companies are on AIM, whose regulation is not worth the paper it is written on, in my view. Over the past couple of years weve seen some woeful examples of AIMs regulatory folks utterly failing to enforce even their own feeble rules, and offering no protection for investors.
Investing your hard-earned savings can be a fraught business at the best of times, but the very least you deserve is a free market governed by an honest regulatory regime. Youll get nothing resembling either of those in China.
No, if you want to invest in something that has delivered great long-term rewards for a century and more, in my view you should stick to UK and US shares.
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