Chinese stocks in a slump: bargain or trap?

Chinese stocks at lows while the world rallies: value or black hole?
Markets in the United States, Europe and Japan are hitting all-time highs almost without interruption. Chinese stocks, by contrast, are languishing in a slump that does not look merely cyclical. Investors are rubbing their hands at the prospect of bargains. But the background noise is deafening.

The silence of a central bank that used to intervene
Months ago, the People's Bank of China was flooding sessions with liquidity to prop up the indices. In recent weeks, not a word. The market reads this as the regime having stopped spending ammunition on a bottomless pit. For some analysts, it signals that the government does not believe in a rebound or prefers to devote resources to other fronts.

Chinese ADRs: a toast to the sun
Investing in Chinese stocks is not like buying Apple shares. You acquire ADRs (american depositary receipts) domiciled in opaque tax havens. If geopolitical tension escalates (as peine with Russia), those securities can end up trapped in a legal limbo. Anyone who bought Russian stocks through a European ETF knows this well: they own them, but cannot touch them.

Even the Chinese aren't buying Chinese stocks
Chinese households allocate only a fraction of their wealth to equities. They prefer property and deposits. The Western promise that stocks always rise in the long run does not resonate in a culture where risk is avoided. If even locals lack confidence, foreigners should ask themselves why.

With accounting books systematically dressed up and an economy many suspect is in recession, the appeal of the discount fades. Perhaps the only one who has not got the message is the Western investor who sees bargains where the Chinese see smoke.