Inefficient Allocation of Capital
By now you should have heard about the rout that is occurring in China’s stock market. One critical factor which you may not be aware of is the exposure of Chinese companies to the market. And we’re not talking about a listed company’s share price decline here.
With China’s economic growth slowing, particularly in manufacturing, many companies have turned to the share market in the pursuit of additional income. Not to raise capital to expand or fund new endeavours, but to deploy capital in shares of other companies.
The Wall Street Journal highlighted this issue in mid June. For the month of April, China’s National Bureau of Statistics announced that profits earned by Chinese manufacturers rose 2.6 per cent, with 97 per cent of the increase due to securities investment income. Profits would have been flat otherwise.
So it’s not just the savings of the Chinese public that is at risk here, but the ability for businesses to stimulate the economy.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.
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