Don't expect too much from China's stocks in short term
Editorial 2012-09-24 09:03
A securities firm in Qingdao. (File photo/Xinhua)
Since this year, China's A-share market has been slackening and has even been dubbed the capital market with the worst performance in the world. After Guo Shuqing assumed the chairmanship of the China Securities Regulatory Commission, the regulator has rolled out a large amount of new policies, yet they have failed to relieve the effect of a structural crisis in the stock market. With the lessons of 2008 still fresh in their mind, decision makers are refusing to launch a further major stimulus package. The country's stock market may thus be mired in stagnation for a long while before the recovery of the US and European economies.
In the short term, the Chinese stock market is vulnerable to the influence of government policy and therefore obtains the name "policy market." In view of the strong power of the Chinese government in controlling the economy, both stock investors and the country's media expect the government to put forth a market salvage plan as they did in 2008. Such a plan is generally opposed by academics, however, who point to the side effects from last time, which included serious inflation, overcapacity in certain industries, declining profits of state enterprises resulting from blind expansion and the mounting debts of municipal governments, problems which still threaten to overwhelm the economy.
Many media outlets have predicted that the government will roll out a stimulus package to stabilize the economy after the Communist Party's 18th National Congress, which will mark the country's once-in-a-decade leadership transition. Ten years ago, the A-share market picked up after the leadership changeover, which in fact was just a short-term response to the stable political environment.
It goes without saying that in the wake of the 18th National Congress, policymakers will first look to stabilize the economy. From the experience of 2008, another massive stimulus package will fuel inflation, an outcome which the new leadership would like to avoid. However, without any stimulus, problems of unemployment may affect social stability. Policymakers will thus be caught in a dilemma between alleviating unemployment and curbing inflation; it would be unrealistic therefore to have too great expectations for the stock market.
This year, domestic economic policy has only had a limited effect on the A-share market, as the dizzying array of new policies rolled out by the China Securities Regulatory Commission has failed to reverse the continuing downturn. In early September, the National Development and Reform Commission gave the green light to a large number of investment projects, which will entail total investment exceeding 1 trillion yuan (US$158 billion). The stock market promptly rebounded, though only for a few trading sessions, underscoring a lukewarm response from stock investors to such sporadic policies.
By contrast, the global economy and especially the policies of the US and Europe will produce a significant influence on China's A-share market. In September, the European Central Bank announced details of a national bond purchase plan, which did not set a ceiling on the purchase amount, creating a favorable international environment for the rebound of A-shares. QE3 followed, as the US Fed announced the purchase of US$40 billion worth of MBS (mortgage-backed securities) each month. Next year, the US may roll out a massive tax cut program, depending on who wins the presidential election. Despite the lukewarm effect on A-shares in the short term, in line with the response of Japan and other nations, the global monetary environment will enter a loose period, which will be favorable to China's stagnant export businesses in the long run.
Nonetheless, the Chinese stock market will trend downward this year in line with the sluggishness of the US and European economies, and bottom fishing can only aim at a few industries and shares. When attending the recent APEC forum in Russia, President Hu Jintao stressed infrastructure projects, saying that the government should support involvement of the private sector. Recently, infrastructure-based companies have begun to receive major injections of financing and loans. Shares in state enterprises and private enterprises related to infrastructure construction are therefore worthy of attention.
On Sept. 18, the National Bureau of Statistics published figures for the realty market in August, which showed a rebounding trend in the market.
Along with the stable progress of China's urbanization, the downward trend of the realty market caused by the outflow of funds and policy pressure will alleviate. With society becoming increasingly capable of withstanding housing prices and the accelerated construction of low-cost housing, the realty industry is also worth a look in the medium and long term.
If the Chinese government responds to QE3 by rolling out stimulus measures on a certain scale following the 18th National Congress, it will give the realty market an even stronger boost.
