China has just harvested a bumper crop of millionaires. The number of Chinese individuals who became dollar millionaires (counting only their liquid wealth, not real estate) soared 82 percent last year to hit 2,378,000, according to just-released data from the Boston Consulting Group.
The twist to the tale? They probably didn't make that money by investing in the Chinese market.
While China remains the world's fastest-growing economy, helping to generate incredible amounts of wealth for those at the very top of what is becoming, with every passing year, an ever more unequal society, it also wrapped up 2013 as Asia's worst performing stock market. The Shanghai Composite posted a decline of 6.75 percent.
Nor is this disappointment a thing of the past. So far this year, the Shanghai index is down nearly 3 percent. By comparison, India's Mumbai Sensex is ahead more than 20 percent, and even Brazil's Bovespa has climbed 7 percent. Even Russia's Micex Index, in spite of the country's economic and geopolitical woes, is doing better. It's essentially flat for the year to date.
Within Asia, Thailand – where political unrest has taken a deep toll on economic growth and where the military recently seized power in a coup – is seeing its stock market fare quite well. The ThaiDEX SET50 ETF, an exchange-traded fund often used as a proxy for the Thai market, is up almost 14 percent year to date.
The problem is, as Goldman Sachs pointed out in a recent investment strategy report, that reasonably rapid economic growth – something China still boasts, even as it struggles to meet its own 7.5 percent GDP growth target this year – doesn't always translate into earnings growth or share price gains. In the two decades leading up to 2013, economic growth in China has dwarfed that of the United States — but U.S. stock market returns outpaced those earned in China to an equally dramatic extent.
There are many theories for why this is. The state continues to play a big role in business and puts its interests ahead of those of maximizing shareholder profits, for instance. Management skills may be weaker, too. None of that is likely to change any time soon. What has happened instead is that China's government appears to be at war with itself, trying to balance the tightly regulated and low-cost "official" lending system (a political necessity) with unintended consequences such as the creation of a massive shadow banking system.
Last year, the China Banking Regulatory Commission calculated this network of non-bank lenders accounted for a whopping 80 percent of the country's GDP. Even if the actual figure is far lower, fears about potential abuses in the murkier parts of this shadow banking network, along with anxiety about the impact of any collapse in asset values, are enough to spook many investors.