Will Chinese Stock Markets
Mirror the Behaviour of the
NASDAQ?
-Where is the solution?
Christopher Poll
Chairman,
Greater China Consultancy Ltd.,
3 QUESTIONS RAISED
? HOW TO DEFINE A,WELL REGULATED
MARKET”?
? WHAT RELEVANCE A PRICE/EARNINGS
RATIO?
? IF INSTITUTIONAL FUNDS ARE A
STABILISING FACTOR FOR THE STOCK
MARKET,WHY ARE DEVELOPED
MARKETS SO VOLATILE?
HOW TO DEFINE A,WELL
REGULATED MARKET”?
The Financial Markets are
Dynamic
? Business is,Proactive”
? But Regulators are,Reactive” not
“Proactive
? The System of Regulation and
Enforcement can never be completely
Flexible and Dynamic
? Importance of Fiduciary Responsibility
Financial Infrastructure
MAIN FACTORS FOR FUNDS
Government
Financial
Policemen
Institutional
Managers
Centred around
Public
Investors
23
Go v e r n m e n t
R e g u la t o rs a n d C e n t ral B a n k
F ina n c ia l Poli c e m e n a r e a d v i s o r s t o
( F oll ow and abide by R ules & R egulations)
Inve s t o rs
Inst it u t ion a l
Qu o t e d C o m p a n ie s A c c o u n t a n t s - Pe n s i o n s
o n St o c k M a r k e t L a wye rs - In s u r a n c e C o,( l i fe )
and - M u tu a l Fun d s
Pr i v a tis e d I n d u s tr i e s M e rchant B a n k s Priv a t e I n v e s t o r
Pr e v i o u s l y N a tion a l i s e d C o m m e rci a l B a n k s - D i r e c t
- In d i r e c t
St o c k M a rke t
PRIVATE SECTOR
LawyersAccountants InvestmentBankers StockBrokers CommercialBanks
Conflict of Interest?
Conflict of Interest
? Who is the client?
? Who are the Financial Policeman
Responsible to?
? Can Regulation be Protect with
Financial Policemen being Proactive?
INVESTORS
Institutional Private
Pensions Insurance Mutual Funds
Investors’ Confidence
=
Investors’ Education
Confidence Education
I
n
v
e
s
t
o
r
s
Investor Protection/Confidence
T r a n sp a r e n cy
E d u ca t i o n
I n f o r m a t i o n / R e p o r t i n g
A n a l y si s
A ccu r a cy o f D a t a
D i sc l o su r e T i m e l i n e ss
C o m p e t e t i o n = A cco u n t a b i l i t y
? Easier and more effective enforcement.
? Increased efficiency reduces costs.
? Improved flexibility of the infrastructure to respond
effectively and competitively.
Efficient Infrastructure
Transparency
Accountability
Leads to:
A Chinese Tailor Made Solution for the
Chinese Fund Industry
Investors’
behaviour
Stock Investors
Fund
Investors
Securities
Dealers
Brokers
Securities
Investment
Advisors
Fund
Managers
Securities
Exchange
OTC
Futures
Exchange
SEC/CSRC
CBC/PBC
WHAT RELEVANCE A
PRICE/EARNINGS RATIO?
Chinese Quoted
Stocks Corporate
Profits
NASDAQ
Corporate Profits
Confidence
$$$
1995 - 2000
C
$
IF CONFIDENCE IS LOW
THEN MONEY FLOW IS MINUTE
CONFIDENCE
$$$$$$$$$$$$$$$$$$
IF CONFIDENCE IS HIGH
THEN MONEY FLOW IS LARGE
What is the Criteria For
Investing?
1,What do you think is the most important
influence on the stock market in
China today?
? The historic balance sheets and profit and
loss accounts of the quoted companies- 6
? The future prospects for corporate earnings-
10
? Government policy-62
? Govt,investigation into mal practices15
? The overall economic growth of the Chinese
economy-27
? China's entry into the WTO-8
2,How do you as an investor analyse the fair
value of the companies you buy & sell?
? By price earnings ratio-35
? By relationship to net asset vale-5
? By the latest rumour-58
? By the business sector the company is
involved in-21
? By multiple of sales revenue-9
3,What do you think should be the average
prospective price earnings ratio for non-
technology stocks?
? under 15 times-0
? 15 to 25 times-18
? above 25-110
4,What do you think should be the average
prospective price earnings ratio?
? under 15 times-0
? 15 to 25 times-1
? 25 to 50-16
? over 50-111
5,How do you measure investment risk?
? By measuring the volatility of the stock-31
? By measuring the volatility of the stock market-42
? By estimating the accuracy of disclosed
information-16
? By estimating the risk of fraud-17
? By analysing historic returns-13
? By comparing with and adjusting for a "risk free"
measure such as a deposit rate-8
At what level do you think the
Shanghai A share market will
be on 31st December 2001?
? most think it will be above 2500
? Today it is 2140
At what level do you think the
Shanghai B share market will
be on 31st December 2001?
? most think it will be above 200
? Today it is 183
IF INSTITUTIONAL FUNDS ARE A
STABILISING FACTOR FOR THE
STOCK MARKET,WHY ARE
DEVELOPED MARKETS SO
VOLATILE?
Factors Effecting Investment
Time Horizons
? Confidence in Long Term Trends
? Confidence in Information Disclosure
? Volatility of Markets
? Liquidity of Markets
? Profit Forecast
? Public Scrutiny of Performance
EACM 100,Equal Weighted (Rebalanced Annually) Index of Hedge Fund Indices described on Previous Slide
R e tu r n a n d R i s k T r a d e o ff,1 / 1 9 9 0 -1 2 / 2 0 0 0
E A C M 1 0 0
E v e n t D r i v e n
R e l a t i v e V a l u e
S & P / L e h m a n
P o r t,
G l o b a l M a c r o
E q u i t y H e d g e
L e h m a n B o n d
S & P 5 0 0
0, 0 %
5, 0 %
1 0, 0 %
1 5, 0 %
2 0, 0 %
2 5, 0 %
0, 0 % 5, 0 % 1 0, 0 % 1 5, 0 %
An n u a l i z e d S t a n d a r d D e v i a t i o n
An
n
u
a
l
i
z
e
d
R
e
t
u
r
n
Ri s k a n d Re t u r n o f S t o c k,Bo n d a n d He d g e F u n d s,
1 / 1 9 9 0 - 1 2 / 2 0 0 0
1 0 0 % E A C M 1 0 0
5 0 % S & P 5 0 0 a n d 5 0 %
L e h, B r o s, B o n d
1 0 0 % L e h m a n B o n d
1 0 0 % S & P 5 0 0
0,00 %
2,00 %
4,00 %
6,00 %
8,00 %
10, 00 %
12, 00 %
14, 00 %
16, 00 %
18, 00 %
0,00 % 2,00 % 4,00 % 6,00 % 8,00 % 10, 00 % 12, 00 % 14, 00 % 16, 00 %
P o r t f o l i o A n n u al i z ed S t an d ar d D ev i at i o n
P
o
r
t
f
o
l
i
o
A
n
n
u
al
i
z
ed
R
e
t
u
r
n
China versus Western Markets
? Limited sense of
Accountability
? Little Understanding of
Risk
? Chinese Business
Philosophy
? Reluctance to
Incentivise Executive
Managers
? Entrepreneurs
Understand Cause
& Consequence
? Risk is Fully
Understood
? Shareholder
Accountability is
accepted
? Share Options and
Profit Incentives
FUND COMPANY
REGULATOR
POLICEMEN
FUND
CUSTODIAN
BENEFICIARY
CERTIFICATE
INVESTORS
ASSETS
MONEY
Basic Concept of Funds as an Investment Vehicle
Mirror the Behaviour of the
NASDAQ?
-Where is the solution?
Christopher Poll
Chairman,
Greater China Consultancy Ltd.,
3 QUESTIONS RAISED
? HOW TO DEFINE A,WELL REGULATED
MARKET”?
? WHAT RELEVANCE A PRICE/EARNINGS
RATIO?
? IF INSTITUTIONAL FUNDS ARE A
STABILISING FACTOR FOR THE STOCK
MARKET,WHY ARE DEVELOPED
MARKETS SO VOLATILE?
HOW TO DEFINE A,WELL
REGULATED MARKET”?
The Financial Markets are
Dynamic
? Business is,Proactive”
? But Regulators are,Reactive” not
“Proactive
? The System of Regulation and
Enforcement can never be completely
Flexible and Dynamic
? Importance of Fiduciary Responsibility
Financial Infrastructure
MAIN FACTORS FOR FUNDS
Government
Financial
Policemen
Institutional
Managers
Centred around
Public
Investors
23
Go v e r n m e n t
R e g u la t o rs a n d C e n t ral B a n k
F ina n c ia l Poli c e m e n a r e a d v i s o r s t o
( F oll ow and abide by R ules & R egulations)
Inve s t o rs
Inst it u t ion a l
Qu o t e d C o m p a n ie s A c c o u n t a n t s - Pe n s i o n s
o n St o c k M a r k e t L a wye rs - In s u r a n c e C o,( l i fe )
and - M u tu a l Fun d s
Pr i v a tis e d I n d u s tr i e s M e rchant B a n k s Priv a t e I n v e s t o r
Pr e v i o u s l y N a tion a l i s e d C o m m e rci a l B a n k s - D i r e c t
- In d i r e c t
St o c k M a rke t
PRIVATE SECTOR
LawyersAccountants InvestmentBankers StockBrokers CommercialBanks
Conflict of Interest?
Conflict of Interest
? Who is the client?
? Who are the Financial Policeman
Responsible to?
? Can Regulation be Protect with
Financial Policemen being Proactive?
INVESTORS
Institutional Private
Pensions Insurance Mutual Funds
Investors’ Confidence
=
Investors’ Education
Confidence Education
I
n
v
e
s
t
o
r
s
Investor Protection/Confidence
T r a n sp a r e n cy
E d u ca t i o n
I n f o r m a t i o n / R e p o r t i n g
A n a l y si s
A ccu r a cy o f D a t a
D i sc l o su r e T i m e l i n e ss
C o m p e t e t i o n = A cco u n t a b i l i t y
? Easier and more effective enforcement.
? Increased efficiency reduces costs.
? Improved flexibility of the infrastructure to respond
effectively and competitively.
Efficient Infrastructure
Transparency
Accountability
Leads to:
A Chinese Tailor Made Solution for the
Chinese Fund Industry
Investors’
behaviour
Stock Investors
Fund
Investors
Securities
Dealers
Brokers
Securities
Investment
Advisors
Fund
Managers
Securities
Exchange
OTC
Futures
Exchange
SEC/CSRC
CBC/PBC
WHAT RELEVANCE A
PRICE/EARNINGS RATIO?
Chinese Quoted
Stocks Corporate
Profits
NASDAQ
Corporate Profits
Confidence
$$$
1995 - 2000
C
$
IF CONFIDENCE IS LOW
THEN MONEY FLOW IS MINUTE
CONFIDENCE
$$$$$$$$$$$$$$$$$$
IF CONFIDENCE IS HIGH
THEN MONEY FLOW IS LARGE
What is the Criteria For
Investing?
1,What do you think is the most important
influence on the stock market in
China today?
? The historic balance sheets and profit and
loss accounts of the quoted companies- 6
? The future prospects for corporate earnings-
10
? Government policy-62
? Govt,investigation into mal practices15
? The overall economic growth of the Chinese
economy-27
? China's entry into the WTO-8
2,How do you as an investor analyse the fair
value of the companies you buy & sell?
? By price earnings ratio-35
? By relationship to net asset vale-5
? By the latest rumour-58
? By the business sector the company is
involved in-21
? By multiple of sales revenue-9
3,What do you think should be the average
prospective price earnings ratio for non-
technology stocks?
? under 15 times-0
? 15 to 25 times-18
? above 25-110
4,What do you think should be the average
prospective price earnings ratio?
? under 15 times-0
? 15 to 25 times-1
? 25 to 50-16
? over 50-111
5,How do you measure investment risk?
? By measuring the volatility of the stock-31
? By measuring the volatility of the stock market-42
? By estimating the accuracy of disclosed
information-16
? By estimating the risk of fraud-17
? By analysing historic returns-13
? By comparing with and adjusting for a "risk free"
measure such as a deposit rate-8
At what level do you think the
Shanghai A share market will
be on 31st December 2001?
? most think it will be above 2500
? Today it is 2140
At what level do you think the
Shanghai B share market will
be on 31st December 2001?
? most think it will be above 200
? Today it is 183
IF INSTITUTIONAL FUNDS ARE A
STABILISING FACTOR FOR THE
STOCK MARKET,WHY ARE
DEVELOPED MARKETS SO
VOLATILE?
Factors Effecting Investment
Time Horizons
? Confidence in Long Term Trends
? Confidence in Information Disclosure
? Volatility of Markets
? Liquidity of Markets
? Profit Forecast
? Public Scrutiny of Performance
EACM 100,Equal Weighted (Rebalanced Annually) Index of Hedge Fund Indices described on Previous Slide
R e tu r n a n d R i s k T r a d e o ff,1 / 1 9 9 0 -1 2 / 2 0 0 0
E A C M 1 0 0
E v e n t D r i v e n
R e l a t i v e V a l u e
S & P / L e h m a n
P o r t,
G l o b a l M a c r o
E q u i t y H e d g e
L e h m a n B o n d
S & P 5 0 0
0, 0 %
5, 0 %
1 0, 0 %
1 5, 0 %
2 0, 0 %
2 5, 0 %
0, 0 % 5, 0 % 1 0, 0 % 1 5, 0 %
An n u a l i z e d S t a n d a r d D e v i a t i o n
An
n
u
a
l
i
z
e
d
R
e
t
u
r
n
Ri s k a n d Re t u r n o f S t o c k,Bo n d a n d He d g e F u n d s,
1 / 1 9 9 0 - 1 2 / 2 0 0 0
1 0 0 % E A C M 1 0 0
5 0 % S & P 5 0 0 a n d 5 0 %
L e h, B r o s, B o n d
1 0 0 % L e h m a n B o n d
1 0 0 % S & P 5 0 0
0,00 %
2,00 %
4,00 %
6,00 %
8,00 %
10, 00 %
12, 00 %
14, 00 %
16, 00 %
18, 00 %
0,00 % 2,00 % 4,00 % 6,00 % 8,00 % 10, 00 % 12, 00 % 14, 00 % 16, 00 %
P o r t f o l i o A n n u al i z ed S t an d ar d D ev i at i o n
P
o
r
t
f
o
l
i
o
A
n
n
u
al
i
z
ed
R
e
t
u
r
n
China versus Western Markets
? Limited sense of
Accountability
? Little Understanding of
Risk
? Chinese Business
Philosophy
? Reluctance to
Incentivise Executive
Managers
? Entrepreneurs
Understand Cause
& Consequence
? Risk is Fully
Understood
? Shareholder
Accountability is
accepted
? Share Options and
Profit Incentives
FUND COMPANY
REGULATOR
POLICEMEN
FUND
CUSTODIAN
BENEFICIARY
CERTIFICATE
INVESTORS
ASSETS
MONEY
Basic Concept of Funds as an Investment Vehicle
