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
G o ver n m e n t
Re g u lat o rs a n d C e n t ral B an k
F in a n cial Po lice m en ar e adv i s or s t o
( F o ll o w a n d a b ide b y Ru les & Re g u latio n s)
In vest o rs
In st it u t io n al
Q u o t e d C o m p a n ies Ac co u n t a n t s - Pensi ons
on Stock Ma r k et L awyers - Insur ance Co.( l i fe)
and - Mut ual F unds
Pr i v ati s ed Indu s tr i e s Merc h an t B an ks Privat e In vest o r
Pr ev i ousl y N ati onali s ed Co m m e rcial B an ks - Dir ec t
- Indir ec t
St o ck M arket
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 cc u 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 c c o 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
Re
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
0,0 0 %
2,0 0 %
4,0 0 %
6,0 0 %
8,0 0 %
1 0,0 0 %
1 2,0 0 %
1 4,0 0 %
1 6,0 0 %
1 8,0 0 %
0,0 0 % 2,0 0 % 4,0 0 % 6,0 0 % 8,0 0 % 1 0,0 0 % 1 2,0 0 % 1 4,0 0 % 1 6,0 0 %
P o r t f o l i o A n 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
P
o
r
t
f
o
l
i
o
A
n
n
u
a
l
i
z
e
d
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
G o ver n m e n t
Re g u lat o rs a n d C e n t ral B an k
F in a n cial Po lice m en ar e adv i s or s t o
( F o ll o w a n d a b ide b y Ru les & Re g u latio n s)
In vest o rs
In st it u t io n al
Q u o t e d C o m p a n ies Ac co u n t a n t s - Pensi ons
on Stock Ma r k et L awyers - Insur ance Co.( l i fe)
and - Mut ual F unds
Pr i v ati s ed Indu s tr i e s Merc h an t B an ks Privat e In vest o r
Pr ev i ousl y N ati onali s ed Co m m e rcial B an ks - Dir ec t
- Indir ec t
St o ck M arket
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 cc u 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 c c o 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
Re
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
0,0 0 %
2,0 0 %
4,0 0 %
6,0 0 %
8,0 0 %
1 0,0 0 %
1 2,0 0 %
1 4,0 0 %
1 6,0 0 %
1 8,0 0 %
0,0 0 % 2,0 0 % 4,0 0 % 6,0 0 % 8,0 0 % 1 0,0 0 % 1 2,0 0 % 1 4,0 0 % 1 6,0 0 %
P o r t f o l i o A n 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
P
o
r
t
f
o
l
i
o
A
n
n
u
a
l
i
z
e
d
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
