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Why China's capital market is one of the world's most lucrative markets

By Chen Jiahe | CGTN | Updated: 2018-09-12 08:05

Editor's note: Chen Jiahe is the Chief Strategist at Cinda Securities. The article reflects the author's opinion, and not necessarily the views of CGTN.

China is now the world's second largest economy and the wealth of its people is accumulating rapidly. While more attention is being paid to wealth management, the good news is that China's capital market is one of the world's most lucrative markets.

Supporting this market is China's economic growth. China's economy is still growing at a healthy rate of around six to seven percent. Although this is lower than the previous level of 10 to 13 percent, it is still a remarkable speed when compared with other countries.

Furthermore, an economy is composed of a variety of sectors and industries. This means that while the overall economy is growing at a rate of six to seven percent, some are growing much faster than others. For example, online shopping, tourism, insurance and wealth management have grown at much faster rates than the average level. While industries like coal, steel and cement have kept pace.

For intelligent investors, these industries offer great long-term investment opportunities.

China's immature and bumpy capital market provides an even greater opportunity for mature investors. Let us use a small hypothetical example to show why.

In a matured capital market, when a fundamental analysis of a stock shows it growing from one to three, the stock's price usually grows steadily and accordingly. This means investors are capable of getting a 200 percent simple and fair return.

However, under the same conditions in an immature market, its price oscillates severely around the fundamental. You might see the price drop from one to 0.5 in the first place, and then grow from 0.5 to six, then drops back from six to three. During this process, a veteran can buy at 0.5 and sell at six, which will bring him a striking 1,100 percent return, much more than what can be obtained in a mature market.

Real world evidence proving the simplified example above can be found between 2009 and 2018, when China's benchmark stock index, i.e., Shanghai Composite Index, stayed almost unchanged. However, some veteran investors in China obtained great investment records during this period.

Take an example, Mr. Guangming Chen, a legendary investor, obtained around 800 percent return during this period of time and successfully enlarged the asset under his company's management from less than 10 billion yuan to over 150 billion. When we look at the investors in the United States, in the past 10 years they have been fighting difficulties with the stock index, as beating the roaring S&P500 Index seems a nearly impossible mission.

Here is a data point that can tell you why I call China's capital market an immature market. Today, around 80 percent of the trading value in China's stock market is still conducted by individual investors, also known as retail investors. As a comparison, only around 10 percent of the trading value in mature stock exchanges like London or New York is conducted by retail investors.

Today in China, the wealth management industry is one of the fastest expanding industries. China's insurance industry is growing at an annual rate of around 20 percent. Funds and asset management companies are becoming more and more professional.

They employ graduates from the world's best universities and recruit veteran investors from all over the world. Now in some of China's middle schools, the science (or you can say the art) of investment is also added to the curriculum.

There is one piece of bad news for international investors when they want to come and invest in China: most legal documents and company reports in the Chinese mainland are written in Chinese only. However, two methods can help them overcome this problem. First, documents in Hong Kong are provided in both Chinese and English. Second, there are many Chinese people who are bilingual. Therefore recruiting good employees is not a very hard task.

Today when you look at the asset allocation of global investors, you can find a shocking fact, which is that the percentage of their assets allocated to China is quite small compared to the scale of China economy and wonderful investment opportunities. However, I would say that this is quite understandable when you think about this: it is never the majority that can spot the best investment opportunity.

  
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