Monopoly factor a key driver of mainland China internet stocks' surge
The mainland's online firms have been reaping the rewards of a restrictive domestic market
In the past few years there has been a noticeable outperformance of Chinese private sector stocks, and this was seen as a sign of economic maturity, as creaky old state-run enterprises gave way to the vibrancy of market-driven entrepreneurialism.
But much of this represents the fact that the privately owned internet stocks have been on a gallop, while Chinese banks have been re-rated downwards. And internet stocks are valued so highly not because of their private-sector superiority. Rather, they have been core portfolio enhancers for the same reason the banks used to be: because they are effectively monopolies.
Perfect competition is all good and well if you're a consumer or economic theorist, but for an investor, there is nothing as alluring as protected profits.
As an example: in the four years following their 2006 listings, ICBC and Bank of China reported average annual earnings per share growth of 28 per cent and 24 per cent respectively. With limited competition for deposits and set interest rates, these banks were raking in the profits.
Foreign players are largely banned from participating in China's internet market
But being blessed by the state is a double-edged sword. China's massive 2009/10 stimulus was conducted through its banks, which were directed to push out loans wide and far. Now the banks are stumbling on fears that loans from this period are quietly festering within the system and because mainland authorities have introduced more competition.
The shadow banking sector has been allowed to grow, creating competition for deposits even as savings rates are now more flexible. More financial reforms are on the way as China tries to increase its capital efficiency. This has brought Chinese bank valuations to historic low levels. Banks that once traded at three times book value are now trading around one times.
