Home » Business » Biz Special
Anxiety trumps policies as rout continues
Print Edition
Fresh government measures failed to stanch this week’s rout in share prices, which has wiped out all this year’s gains, lost many people their family savings and roiled global financial markets.
Yesterday, after some valiant moves into positive territory, the Shanghai Composite Index lost steam and closed down 1.27 percent to 2927.29. That adds up to a 16.5 percent loss in three days.
“The latest easing measures failed to induce an immediate rebound as investor confidence has been damaged by drastic slumps,” said financial commentator Zhan Hao, “A bounce can be expected in the short term but the sustainability will still remain to be seen.”
The continued slump in the share market flies in the face of government attempts to restore order to equities. On Tuesday, the People’s Bank of China announced an immediate 25-basis-point cut in the benchmark lending rates and the deposit rates. It also said the reserve requirement ratio, the amount of deposits banks are required to hold, will be cut by 50 basis points. A few days earlier, the government announced that pension funds would be allowed to invest their considerable assets in stocks for the first time.
While the patient ails, the government “remedies” are piling up. In July, when the share market experienced the first crash of the bull rally, authorities suspended new share offerings, outlawed short selling, halted trading in the shares of some state-owned companies, and directed large stakeholders in major companies to stop selling and start buying.
While all this was going on, Chinese exports slumped 8.3 percent, the central bank announced a surprise devaluation of the yuan, and a major indicator of factory activity fell to a six-year low.
“The devaluation of the yuan, a decline in exports and multiple signs that China’s economic pulse is slowing down at a much faster pace than expected have created a toxic cocktail, fuelling uncertainty and eroding confidence in the turnaround of the Chinese economy,” said Kamel Mellahi, a professor of the Warwick Business School who researches emerging markets.
The problem for the government is that many individual investors, who comprise 75 percent of investors in China’s stock markets, jumped into the bull run earlier this year on the belief that the government would be the backstop if the rally turned sour. Many of the 20 percent of students believed to be market players for the first time this year, naively believed that markets go up but don’t go down.
“I trusted the government when it indicated in July to keep lifting the market until it reaches 4,500 points,” said Cindy Zhou, 28, a white-collar worker who has invested in shares. “I chose to stay in the market, which cost me a 30 percent loss. Now I have decided to stay on the sidelines rather than believing in the government capability to turn the market around.”
Losing money is a bitter lesson for market amateurs. A massive selloff in Chinese shares on Monday sent the benchmark Shanghai Composite Index down 8.5 percent, the biggest daily loss since February 2007. That was followed by a 7.6 percent dive on Tuesday.
Global markets, too, have been roiled by the performance of Chinese shares and by mounting fears that the world’s second-largest economy may be heading into a slowdown sharper than expected.
Many analysts say the Chinese government should really be focusing on shoring up the economy rather than shoring up share prices.
“Perhaps the authorities have realized the futility of trying to prop up prices through direct purchases and it makes more sense to concentrate on macro repercussions,” said Mark Williams, an economist with Capital Economics in London.
The Caixin flash PMI, a reading of manufacturing activity, was released last week. For August, it dropped to a six year low of 47.1. A reading below 50 signals contraction.
The Chinese government has been trying to gently deflate bubbles in the economy and has talked extensively about the “new normal,” an environment where growth is put on a more sustainable track and the economy shifts from export-led to consumption-driven. One of the obstacles in engineering that outcome is the massive local government debt that has accrued in recent years.
The Chinese government has said it wants to introduce more market-driven forces into the economy. Its attempts to intervene in the stock market seem to be a step backward, however.
“The government faces a dilemma,” Lim Say Boon, chief investment officer at DBS Bank, wrote in a note. “It is the same moral hazard any government faces in intervening to achieve a non-market outcome in a market.”
At least on one front, things are looking up. Analysts said the risk from rampant earlier growth of margin lending has been generally contained. The outstanding balance of margin trading on the Shanghai and Shenzhen exchanges decreased by nearly 50 percent to 1.2 trillion yuan (US$187.2 billion) on Monday from a record high of 2.3 trillion yuan in June.
Chinese shares have long been traded away from fundamentals. According to UBS Securities, A-shares as of Monday were still expensive, with an average price-earnings ratio at 21.1. Excluding banks, the PE ratio was 35.6.
Lim added, “If the problem is overvaluation – or at least ‘full valuation’ – then the ‘cure’ would be lower prices or higher earnings.”
This summer’s market ructions leave in doubt the government’s stated intentions to modernize equities trading.
“The market turmoil has exposed those flaws related to trading mechanisms, price limits, short selling rules and regulatory coordination,” said Guan Qingyou, executive head of Minsheng Securities’ Research Institute. “To address these issues should be a priority for future government actions.”
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
