LETTING AIR OUT
OF THE CHINESE
MARKET
Chinese stocks have been taking a
battering of late, losing more than
13% in just five trading days to June
23. However, that follows a 35%
gain in the Shanghai composite
index in the year to date or a rise
of 146% in the past year – more a
stampede than a bull run.
The Chinese market is a difficult one
to understand, particularly as its
movements are often driven more
by government policy than normal
market forces. We asked Standard
Bank’s Beijing-based economist,
Jeremy Stevens, what was going on.
The answer is that government is
letting some air out of the market,
which it is wont to do from time
to time.
“The authorities would naturally be
quite uncomfortable with the speed
in which equities have increased
in value this year. While the rising
market suits the overall policy
agenda, the fact that valuations
are so high and margin trading
has surged so swiftly does not
reflect the goldilocks scenario
Beijing desires.”
He says the problem is if values
continue to go higher, it will
encourage excessive risk that
has no economic foundations. “A
worst-case scenario would be if
the asset price appreciation ends
up limiting the policy agility here
in China. Should the state council
and People’s Bank of China decide
they need to more aggressively
support the economy through
cutting interest rates, they do not
want that decision to be taken off
the table because of the impact it
would have on stock prices. That
is why they have taken a number
of administrative actions to let
a little air out of the market in
recent months.”
Stevens says the rally has very little
justification based on economic
data and the gains are being aided
by the overall policy dynamic.
“But from time to time it will be
advisable for the authorities to
let some air out. All the while,
authorities do have considerable
ability to maintain the rally for some
time. So it's a correction on some
scores, but not in the sense that
economic softness is reflecting in
market sentiment.”
Commodities, meanwhile, remain
in the doldrums, with the copper
price falling from $6 446/ tonne
on 12 May to $5680/tonne on
22 June, largely due to the weak
economic picture in China – the
largest consumer of the industrial
metal. That means copper is on a
par with gold in terms of relative
performance over 12 months. ■
"
A worst-case
scenario
would be if the
asset price
appreciation
ends up
limiting the
policy agility
here in China,
Jeremy Stevens,
Standard Bank’s
Beijing-based
economist
ISSUE 4 – JULY 2015
49