Is now the time to buy China A shares? It's the question on everyone's lips after the Shanghai Composite rose 4 per cent last week, ostensibly on supportive market reforms announced by the government, but in reality on hopes that the mainland's dormant volcanoes - retail investors - are finally ready to start buying.
Mainland retail investors, who comprise 35 per cent of the onshore investor base but account for 80 per cent of daily turnover - have had a tough time of it of late. A study of 8,500 households by Chengdu's Southwestern University of Finance and Economics found that of those with any stock investments, 77 per cent had yet to make a profit.
At the same time, the retail-fuelled, 470 per cent rise in the Shanghai Composite Index in 2006-07 is remembered with longing and anticipation. Could it happen again? Some analysts believe the index is poised to rally 48 per cent higher by mid-2013. Others - myself included - suspect last week's rally was yet another false dawn destined to flounder like so many others.
Optimism about a genuine onshore rally has been primed by the recent performance of its offshore variant, the H-share market. Since mainland China's green shoots started emerging and the US launched its liquidity-rich quantitative easing initiative in mid-September, the Hang Seng China Enterprises Index has rallied more than 15 per cent. Moreover, there's no sign of a let-up in enthusiasm; for example, China-related equity inflows recorded over the past two weeks were the largest in more than two years.
Conversely, the Shanghai Composite Index - long beaten up by negative earnings growth and multi-year underperformance - has fallen by more than 4 per cent. "But it's cheap," cry the value hunters; indeed, it's one of the cheapest major markets in the world, with a price-to-earnings ratio in single digits. Unfortunately, as Japan has taught us, what is cheap, worryingly, can become cheaper still.
