Chinese equities: the political index

As the seven men who will lead China for the next five years walked out onto the stage of the Great Hall of the People last Thursday, stock market traders with a sense for politics swung into action.

Less than two hours after Zhang Gaoli, the new seventh-ranked member of the Communist Party of China’s Politburo Standing Committee, stood in front of the popping of flash bulbs, Hong Kong-listed shares of Xinyi Glass had leapt more than six per cent.

That is because Zhang Gaoli’s son-in-law, Li Shengpo, just happens to be the son of Li Yixian, chairman of Xinyi Glass, which makes glass for cars, solar batteries and buildings.

The Lis are from a county right next to the one where Zhang grew up in south China’s Fujian province and their businesses have usually done remarkably well in the jurisdictions Zhang has overseen as a senior party official.

It is a well-established fact that successful traders in China’s notoriously opaque stock markets need to be able to read political tea leaves as well as a company’s balance sheet.

“Economics and politics are deeply intertwined in China and companies’ fortunes often rise and fall because of perceived connections to rising or falling political figures,” says Fraser Howie, co-author of Red Capitalism.

On Monday, the market was treated to another lesson in the power of political signals after a speech over the weekend by Xi Jinping, the new chief of the Communist party and military, in which he vowed to crack down on corruption.

The five companies with the biggest daily price declines on the Shanghai Stock Exchange on Monday were all producers of the fiery Chinese liquor “baijiu”, a favourite tipple for government banquets and a common bribe used by businessmen to ingratiate themselves with officials.

“You see, the Chinese stock market is actually more of a political index,” said one senior Chinese banker who asked not to be named for fear of offending powerful officials who exercise enormous control over all aspects of the capital markets in China.

Of course, the phenomenon is not new and was clearly identifiable earlier this year when former high-flying Chinese politician Bo Xilai was detained and purged from the party in connection with his wife’s murder of British businessman Neil Heywood.

Shares in listed companies from Chongqing, the city-province Bo ruled as Communist party chief, and Dalian, where he had served in government for years, tanked after news of his downfall broke in March.

While companies in mainland China that are associated with bribery and official largesse were hit on Monday following Xi’s speech, overseas luxury companies that benefit from China’s “gift-giving” culture seem to have received a boost.

Following Xi’s weekend speech, Hong Kong-listed shares in Prada jumped nearly 5 per cent in two days to HK$64.35 before settling down around HK$62.90 by the end of trade on Tuesday.

One Hong Kong-based trader said the rationale was that Chinese officials and the businessmen who like to give them gifts are more likely to buy luxury products abroad while an anti-corruption campaign is happening at home.

Related reading:
Markets cool on China’s new leaders, beyondbrics
In depth China leadership transition, FT
Chinese shares are just not cheap enough, FT