S-chips: Corporate Governance Concerns Vs Spillover Effects Of China's Growth
The recent spate of corporate scandals involving S-chips (or Singapore-listed Chinese companies) did not seem to dampen investors' risk appetite for Chinese stocks. In fact, the FTSE ST China Index gained almost 70 per cent over a 16-week period - from the March 9 low to June 30, outstripping the 60 per cent climb in the benchmark Straits Times Index (STI) during the same period.
Analysts said the improved investor sentiment towards China stocks in recent months stemmed from two key factors - the widespread optimism about the pace of recovery in China's economy and the country's robust domestic demand.
"China's economic recovery does play an important part in the S-chips' rally. Furthermore, going forward, there are high hopes that China will still be one of the fastest growing economies globally," said Ms Pauline Lee, Investment Analyst, Kim Eng Research Pte Ltd. "The S-chip sector will be a direct beneficiary of China's economic recovery, but this will only apply to S-chips with sound business model, strong corporate governance and a strong balance sheet," she added.
Unlike many observers who are betting that China is on a fast track toward recovery, Mr Luke Foong, a retail investor, has expressed reserved optimism over the outlook of the world's third largest economy. However, he noted the widely articulated view that China's economic recovery is underway has been further entrenched by the sightings of 'green shoots' - such as the growths in China's retail sales and industrial output in May - in recent months. "This general sense of optimism has certainly benefitted S-chips as most of their business operations are located in China," Mr Foong said.
Notwithstanding the optimistic outlook for the Chinese economy, the question arises as to whether the recent rally by S-chips also reflected investors' diminishing concerns about corporate governance? Several observers doubt so.
"Most investors will give due weight to the extent good corporate governance is practised by a listed company before making long term investment decisions on the company's securities," said Mr Robson Lee, partner at Shook Lin & Bok LLP. Noting that the stock market is largely made up of two groups of market participants - true investors and speculators, Mr Lee added: "A company that has bad publicity as regards its lack of proper corporate governance and/or market disclosures would ordinarily be eschewed by rational investors for fear of corporate mismanagement and/or a lack of reliable market information."
Such stocks could nevertheless attract many speculators who might be driven by a "herd instinct to profiteer" because of a market rumour, Mr Lee noted. "These speculators are hoping to take a short term calculated risk to buy now and sell at a higher price before the froth disappears."
While Mr Foong believes the quality of corporate governance standards in Singapore-listed Chinese companies remains a major concern among many retail investors, he added that the recent rally by S-chips did not surprise him. "The earlier market selldown was due to panicky investors dumping their shares on continued worries about the global economy. The subsequent improvement in market sentiment led to investors aggressively seeking bargains. Those beaten-down S-chips hence became the darlings of 'bargain hunters' and short-term speculative traders," Mr Foong reasoned.
