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The Chinese stock market is the strang- est one among all stock markets in the world. Usually the stock index can grow along with the economy, but it is not a case in China. Of course, not all countries’economic development is positively related with the trend in their stock markets. However, normal analysis and ordinary forecast do not work for the Chinese stock, which can be said to be a “maze”.
The Chinese economic size (based on its GDP) increased by 500% from 1.453 trillion US dollars to 7.298 trillion US dollars in ten years. By contrast, the index in the Shanghai Stock Exchanges increased from 1,640 points to 2,170 points with only a 27% increase in the same period. In 2007, the stock index once hit the ceiling of 6,000 points, but the grace was soon lost thanks to the international financial crisis in 2008.
Recently, things are getting worse. In September, the US government launched the 3rd round of quantitative easing, causing the global stock market to rebound. But the Chinese stock was not included. And, when people think it could not be lower, another round of fall began.
From this year, the Shanghai Composite Index already fell by 8%. This is lower than the stock index in August and September 2011 during the stock slump caused by the European debt crisis and the lowered US sovereign credit ratings, and close to the lowest point in 2008 when the financial crisis was sweeping the world. Many Chinese individual stock investors are so desperate that they want to the leave the stock market.
When and where did the Chinese stock market get wrong? Then, when will the real rebound occur since the stock market has been in the valley for such a long time. Korean financial magazine Weekly BIZ had its own interpretation of the Chinese stock market – the most mysterious financial market in the world.
From August 2009 to now, the US Standard& Poor 500 increased by 45% or so in three years. In comparison, the Shanghai Composite Index dropped 40%. At the same time, the Korean stock index increased by 27%. German stock index increased by 34%, and British 23%. Two years ago, the Price/Earning Ratio of Shanghai Composite Index was over 20, and now it dropped to 10 –the Shanghai Composite Index has become a kind of “cheap” stock less valuable than the Standard& Poor 500.
When did the Chinese stock market become the only victim of slump? There are many reasons? But the most reasonable answer is with the distrust of the Chinese economy and Chinese government. The Chinese economy is hard to see real turnaround due to the international economic situation. And the Chinese government did not show any will to support the stock market. Alternatively, this is the “distrust of the Chinese government”. Previously, the Chinese stock is more reliant on the government’s “will of supporting the stock market” than the economic growth.
The Chinese government controls the stock market?
First of all, China’s capital market is strictly controlled by the government, which mercilessly limits the quota of foreign investment. This is because the Chinese government feared the inflow of hot money, which will finally lead to inflation. Foreigners who want to invest in China’s domestic A-share market must earn the title of Qualified Foreign Institutional Investor and the total amount of investment of foreign investors should not be over 80 billion US dollars, accounting for 3% of the total value of the A-share market. Half of the investors in the A-share market are Chinese individuals, and the rest are institutional investors like China Investment Corporation. Therefore, the Chinese market is immune to any benefits from the US government’s effort of increasing the fluidity of US dollar.
The Chinese stock market is called the “bonanza” for the state-owned enterprises (SOEs) of China. Every time Chinese government needs to raise capital, it will support the stock market forcefully. In addition, 74% of the value of the A-share market is taken by SOEs, 70% of whose shares are held by the government. Thus, there are analysts saying that unlike the individual investors, the Chinese government is not influenced by the fall of stock price and it can adjust the stock price upward when needed.
From 2006 to 2007, the Shanghai Composite Index drastically increased to 6,000 points or 6 times the figure in 2005. Though the dramatic growth of Chinese economy could partially explain the crazy stock market, the main reason is the intervention of the Chinese government. At that time, the Chinese government compulsively turned the non-tradable shares of SOEs into tradable shares.
Usually, the stock market will fall when the proportion of tradable shares increases, but the Chinese government established the “term of moratorium of trading shares”, which limited the stock trade for a certain while. In addition, the Chinese government provided free stocks or cashes in the name of “bonus” to repay the loss of investors holding tradable shares. Therefore, investors crazily bought in shares, leading to the monster increase of the stock price. Then, when the sub-prime debt crisis broke out in the US, the Chinese stock market met the end of the “moratorium of trading shares”, which was followed by the great increase in stock supply and the drastic decrease of stock price. At that time, the US stock market dropped by a half while the Chinese stock market got down by three quarters. Notable is that SOEs in China raised the capital amounting to CNY 1.4 trillion during the bull market in 2006 and 2007, twice as much as they did five years before. Blessed by the government, SOEs made a killing.
The Chinese government took measures to support the stock market for the second time in 2009. Then, in order to deal with the impact of the international financial crisis, Beijing launched the economic stimulus package with the budget of CNY 4 trillion yuan. It also initiated the banking credit of CNY 10 trillion, which made the money supply increase at a 30% rate. The result was that the stock index increased to 3,460 points in 2009. Meanwhile, the government ordered SOEs and banks to launch massive capital increase plans. As the volume of capital kept increasing, the stock index increase reached its limit. Last year the Chinese government turned to the tight control, causing the stock price to drop again.
Chinese government has no will to implement intensive economic support policies?
Of course, if the Chinese economy turns better and the Chinese government takes positive support policy from now on, the stock market is likely to rise again. That’s because investors that want to get high yield from bubbles existing everywhere. However, many people believe that the Chinese economy will not turn better in a short while, and the support policies will not come either.
The manufacturing that is continuously worsening is another reason for the unavailability of the support policy. Influenced by the economic depression of developed countries, the export of China kept decreasing in recent months. In September the PMI of China dropped to 47.8. This was the 11th straight month that the PMI dropped below 50. The performance of SOEs, which took 74% of the total value of stock market, also suffered deterioration for three straight quarters. Some people worry that it is hard for the Chinese government to complete the task of“realizing the 7.5% economic growth rate” this year.
In addition, the Chinese government did not take any offensive economic support policy. China is facing the change of leadership and any policy might be replaced or adjusted after that. Then, the excessive release of market fluidity made it hard to continue the current monetary policy. The debt of local governments is also a big problem. By the end of September, the debts of local governments amounted to CNY 11 trillion, accounting for 17% of China’s GDP. The Chinese government indeed took initiatives to deal with these frustrating problems. From October 2010, the Chinese government took the tight monetary policies like increasing the interest rate to restrain the property bubble and inflation caused by the excessive fluidity. From this June, it lowered the interest rate twice to ease the tight control. However, the Chinese government did not launch powerful and positive support policy even though it showed slight determination of stopping the stock market from falling by reducing the stock trade commission charges.
The desperate investors turned to the investment into securities. The Chinese government never missed the feast – it more and more frequently raised capital through issuing corporate bonds. In the first eight months of this year, the newly-issued corporate bonds amounted to CNY 386 billion, up 150% year on year. In comparison, the size of IPO in the same period had dropped 51% over a year before.
Further impact will hit the stock market if measures are taken to improve economy
The bigger problem is that the Chinese government is turning from short-term support policy to the systematic improvement through changing income distribution and restructuring SOEs when it comes to boosting the economy. For the stock market, this means that bright will not illuminate it in a short while.
As analyzed, the National People’s Congress of China at the beginning of this year lowered the targeted economic growth rate of this year to 7.5%, showing that the Chinese government no longer held onto the high-speed increase. In addition, the Chinese Monetary Policy Committee said in its Q3 Regular Meeting that the Chinese government will continue its discreet monetary policy though the US had already launched its QE3. The Chinese government will particularly pay attention to stable economic growth, economic structure adjustment and control of inflation, as well as the balance among these three aspects.
The Chinese government recently began to make an overhaul to SOEs that suffered loss. A series of innovative and reform measures were launched to reinvigorate the private business. In addition, the National Development and Reform Commission submitted the reform plan about the income allocation system to the State Council twice at the beginning of 2010 and at the end of 2011. The measures included distributing income from state-owned assets and public resources more fairly, adjustment of tax for high-income earners, management of the salaries for executives of state-owned financial institutions and so on. If these measures are indeed implemented, the large SOEs engaged in banking, energy, steel and so on, which took most of the stock market value, will see worsening businesses. This is undoubtedly bad news for the Chinese stock market, since it is reliant on those SOEs so much.
The external environment determined that the Chinese stock market is hard to see turnaround in a short while. According to some experts, the Chinese stock market might rebound temporarily at the end of this year and the beginning of next year based on the economic circulation theory. They do not expect the economic index to get better. They just want them to stop being worse.
But strictly, the future of Chinese stock market depends on the “result of structural change”and “recovery of trustiness”. If the Chinese government can substantially launch the structural reform, improve performance of enterprises and create a stock market based on market theories, the Chinese stock market could re-emanate its hidden charm anytime.
The Chinese economic size (based on its GDP) increased by 500% from 1.453 trillion US dollars to 7.298 trillion US dollars in ten years. By contrast, the index in the Shanghai Stock Exchanges increased from 1,640 points to 2,170 points with only a 27% increase in the same period. In 2007, the stock index once hit the ceiling of 6,000 points, but the grace was soon lost thanks to the international financial crisis in 2008.
Recently, things are getting worse. In September, the US government launched the 3rd round of quantitative easing, causing the global stock market to rebound. But the Chinese stock was not included. And, when people think it could not be lower, another round of fall began.
From this year, the Shanghai Composite Index already fell by 8%. This is lower than the stock index in August and September 2011 during the stock slump caused by the European debt crisis and the lowered US sovereign credit ratings, and close to the lowest point in 2008 when the financial crisis was sweeping the world. Many Chinese individual stock investors are so desperate that they want to the leave the stock market.
When and where did the Chinese stock market get wrong? Then, when will the real rebound occur since the stock market has been in the valley for such a long time. Korean financial magazine Weekly BIZ had its own interpretation of the Chinese stock market – the most mysterious financial market in the world.
From August 2009 to now, the US Standard& Poor 500 increased by 45% or so in three years. In comparison, the Shanghai Composite Index dropped 40%. At the same time, the Korean stock index increased by 27%. German stock index increased by 34%, and British 23%. Two years ago, the Price/Earning Ratio of Shanghai Composite Index was over 20, and now it dropped to 10 –the Shanghai Composite Index has become a kind of “cheap” stock less valuable than the Standard& Poor 500.
When did the Chinese stock market become the only victim of slump? There are many reasons? But the most reasonable answer is with the distrust of the Chinese economy and Chinese government. The Chinese economy is hard to see real turnaround due to the international economic situation. And the Chinese government did not show any will to support the stock market. Alternatively, this is the “distrust of the Chinese government”. Previously, the Chinese stock is more reliant on the government’s “will of supporting the stock market” than the economic growth.
The Chinese government controls the stock market?
First of all, China’s capital market is strictly controlled by the government, which mercilessly limits the quota of foreign investment. This is because the Chinese government feared the inflow of hot money, which will finally lead to inflation. Foreigners who want to invest in China’s domestic A-share market must earn the title of Qualified Foreign Institutional Investor and the total amount of investment of foreign investors should not be over 80 billion US dollars, accounting for 3% of the total value of the A-share market. Half of the investors in the A-share market are Chinese individuals, and the rest are institutional investors like China Investment Corporation. Therefore, the Chinese market is immune to any benefits from the US government’s effort of increasing the fluidity of US dollar.
The Chinese stock market is called the “bonanza” for the state-owned enterprises (SOEs) of China. Every time Chinese government needs to raise capital, it will support the stock market forcefully. In addition, 74% of the value of the A-share market is taken by SOEs, 70% of whose shares are held by the government. Thus, there are analysts saying that unlike the individual investors, the Chinese government is not influenced by the fall of stock price and it can adjust the stock price upward when needed.
From 2006 to 2007, the Shanghai Composite Index drastically increased to 6,000 points or 6 times the figure in 2005. Though the dramatic growth of Chinese economy could partially explain the crazy stock market, the main reason is the intervention of the Chinese government. At that time, the Chinese government compulsively turned the non-tradable shares of SOEs into tradable shares.
Usually, the stock market will fall when the proportion of tradable shares increases, but the Chinese government established the “term of moratorium of trading shares”, which limited the stock trade for a certain while. In addition, the Chinese government provided free stocks or cashes in the name of “bonus” to repay the loss of investors holding tradable shares. Therefore, investors crazily bought in shares, leading to the monster increase of the stock price. Then, when the sub-prime debt crisis broke out in the US, the Chinese stock market met the end of the “moratorium of trading shares”, which was followed by the great increase in stock supply and the drastic decrease of stock price. At that time, the US stock market dropped by a half while the Chinese stock market got down by three quarters. Notable is that SOEs in China raised the capital amounting to CNY 1.4 trillion during the bull market in 2006 and 2007, twice as much as they did five years before. Blessed by the government, SOEs made a killing.
The Chinese government took measures to support the stock market for the second time in 2009. Then, in order to deal with the impact of the international financial crisis, Beijing launched the economic stimulus package with the budget of CNY 4 trillion yuan. It also initiated the banking credit of CNY 10 trillion, which made the money supply increase at a 30% rate. The result was that the stock index increased to 3,460 points in 2009. Meanwhile, the government ordered SOEs and banks to launch massive capital increase plans. As the volume of capital kept increasing, the stock index increase reached its limit. Last year the Chinese government turned to the tight control, causing the stock price to drop again.
Chinese government has no will to implement intensive economic support policies?
Of course, if the Chinese economy turns better and the Chinese government takes positive support policy from now on, the stock market is likely to rise again. That’s because investors that want to get high yield from bubbles existing everywhere. However, many people believe that the Chinese economy will not turn better in a short while, and the support policies will not come either.
The manufacturing that is continuously worsening is another reason for the unavailability of the support policy. Influenced by the economic depression of developed countries, the export of China kept decreasing in recent months. In September the PMI of China dropped to 47.8. This was the 11th straight month that the PMI dropped below 50. The performance of SOEs, which took 74% of the total value of stock market, also suffered deterioration for three straight quarters. Some people worry that it is hard for the Chinese government to complete the task of“realizing the 7.5% economic growth rate” this year.
In addition, the Chinese government did not take any offensive economic support policy. China is facing the change of leadership and any policy might be replaced or adjusted after that. Then, the excessive release of market fluidity made it hard to continue the current monetary policy. The debt of local governments is also a big problem. By the end of September, the debts of local governments amounted to CNY 11 trillion, accounting for 17% of China’s GDP. The Chinese government indeed took initiatives to deal with these frustrating problems. From October 2010, the Chinese government took the tight monetary policies like increasing the interest rate to restrain the property bubble and inflation caused by the excessive fluidity. From this June, it lowered the interest rate twice to ease the tight control. However, the Chinese government did not launch powerful and positive support policy even though it showed slight determination of stopping the stock market from falling by reducing the stock trade commission charges.
The desperate investors turned to the investment into securities. The Chinese government never missed the feast – it more and more frequently raised capital through issuing corporate bonds. In the first eight months of this year, the newly-issued corporate bonds amounted to CNY 386 billion, up 150% year on year. In comparison, the size of IPO in the same period had dropped 51% over a year before.
Further impact will hit the stock market if measures are taken to improve economy
The bigger problem is that the Chinese government is turning from short-term support policy to the systematic improvement through changing income distribution and restructuring SOEs when it comes to boosting the economy. For the stock market, this means that bright will not illuminate it in a short while.
As analyzed, the National People’s Congress of China at the beginning of this year lowered the targeted economic growth rate of this year to 7.5%, showing that the Chinese government no longer held onto the high-speed increase. In addition, the Chinese Monetary Policy Committee said in its Q3 Regular Meeting that the Chinese government will continue its discreet monetary policy though the US had already launched its QE3. The Chinese government will particularly pay attention to stable economic growth, economic structure adjustment and control of inflation, as well as the balance among these three aspects.
The Chinese government recently began to make an overhaul to SOEs that suffered loss. A series of innovative and reform measures were launched to reinvigorate the private business. In addition, the National Development and Reform Commission submitted the reform plan about the income allocation system to the State Council twice at the beginning of 2010 and at the end of 2011. The measures included distributing income from state-owned assets and public resources more fairly, adjustment of tax for high-income earners, management of the salaries for executives of state-owned financial institutions and so on. If these measures are indeed implemented, the large SOEs engaged in banking, energy, steel and so on, which took most of the stock market value, will see worsening businesses. This is undoubtedly bad news for the Chinese stock market, since it is reliant on those SOEs so much.
The external environment determined that the Chinese stock market is hard to see turnaround in a short while. According to some experts, the Chinese stock market might rebound temporarily at the end of this year and the beginning of next year based on the economic circulation theory. They do not expect the economic index to get better. They just want them to stop being worse.
But strictly, the future of Chinese stock market depends on the “result of structural change”and “recovery of trustiness”. If the Chinese government can substantially launch the structural reform, improve performance of enterprises and create a stock market based on market theories, the Chinese stock market could re-emanate its hidden charm anytime.