“The people may be made to follow a path of action, but they may not be made to understand it.”
It seems as though the Chinese leaders are interpreting this Confucian quote according to their needs, but the Chinese people are showing they understand much more than given credit for.
The Economist reports on the accuracy of Chinese companies’ corporate earnings, or lack thereof, in a recent article. It seems that in 2007 China adopted more internationally accepted accounting standards, at which point their share prices were expected to rise and fall more in line with corporate earnings. It turns out this was not the case. The most glaring examples have been in odd debt restructuring plans that have become commonplace in China (but rare elsewhere). These are boosting corporate earnings, but leaving share prices flat.
Why do we mention this? Because it reiterates our view that share prices are one of the most precise forms of indicator we have for a company’s health. If a Chinese company has a strong balance sheet, a steady flow of imports and exports and has big gains in corporate earnings, these can all be good signs. A falling share price, however, can say much much more.
While it is much harder for non-Chinese to buy Chinese company shares, those who do buy them, no matter where they be from, buy them to make a profit. Even if we cannot use this information to buy the shares, we can use it as indicator of the Chinese companies’ overall strength. When these share prices are going one way, while corporate earnings another, it is the former that will paint a more realistic picture of the company’s health. It looks as though the Chinese have understood this and are following their own path of action.
