Dan David is cofounder of GeoInvesting, a Skippack firm that investigates and reports on China-based, publicly-traded companies, including those accused of falsifying investor information, for short-sellers and other investors. He agreed to talk today about the China stock market, whose benchmark Shanghai Stock Market Composite Index is off 32% since June 12. Transcript edited for clarity.
(Are you seeing all the companies you ever warned about plunging?) Yes. This is... related to the shenanigans coming from the government of China:
-- 40% of companies on their exchanges have now requested a halt in trading their stocks to stem the ability of average investors to sell.
-- And, in the most shocking move, the China regulators have enacted a rule that any shareholder owning 5% or more of a company cannot sell as of today for 6 months. Both of these issues are in my opinion an appalling manipulation of the global markets.
(Is this a short-term 'correction' or a long-overdue taking-out-of-the-trash?) This is a 'long-overdue taking-out-the-trash'. However there is soo much trash they can't possibly find a dump big enough.
Two years ago, China was forced to deal with their shadow banking issues. Last year, they were forced to deal with their real estate issues. So all investors ran to the their stock market (since they are not allowed to invest in foreign markets). This year, their market exploded with valuations completely detached from reality.
We saw this movie (in English-speaking stock markets) back in 2008. I believe we are going to see either an exact replay (in China, this time) with this being the 'Bear Sterns bump,' with pundits and governments saying (this is temporary), only to realize months later a 'Lehman collapse', or a huge correction...since the six-month lock up on 5% holders will give them some time. (He thinks the collapse is more likely.)
(Are better companies holding up, is there a flight to quality? Any reason to hope when the market comes back it will be with companies that are any more transparent/less dishonest than during the long stock-market boom?)
No company will hold up in the short term. But, yes, there will be a flight to so-called quality. I say so-called, since quality is measured differently in China.
As in, when high ranking government officials are invested in, or just want a (bad) company to thrive, then that company will, in fact, thrive.
No transparency or honesty on the horizon out of China. If anything, less transparency has been their modus operandus...
I can provide dozens of links related to the Chinese government threating and jailing our investigators for doing basic due-diligence. As far as honesty goes, why would they be honest? If they steal from us they get to keep what they steal. No Chinese citizen has ever gone to jail for stealing from Americans.
(None?) Keep in mind that Dickson Lee of LL Energy was an American citizen or he would not have gone to jail either. It's not illegal in China for a China based CEO to steal from U.S. investors. But if they steal 6k from their own people they could get the death penalty. It's an asymmetrical proposition.
(Links provided by Dan David):