It is rash to expect a rerun of past stock market booms in China
One way to profit from Chinese equities is to play a familiar paradox. Market participants know that when economic growth ebbs significantly, Shanghai share prices tend to rally.
The key to this incongruity might be called the “Communist party put”. In the same way that Alan Greenspan, former chairman of the US Federal Reserve, used to relax US monetary policy when dynamism stalled, a tactic known as the “Greenspan put”, China’s ruling party often steps in when commerce starts to wilt.
“Chinese equity markets aren’t focused on marginal changes in earnings expectations; they are focused on policy,” said Thomas Gatley, a Beijing-based analyst at research firm, Gavekal. “The only thing that Chinese markets like more than booming earnings growth is expectations of a muscular policy response.”
Thus it is the expectation that Beijing will intervene to ease a multitude of impacts, from the trade war with the US to declining car sales and a slowing housing market, that is underpinning Chinese equity prices. The Shanghai stock index is up more than 20 per cent this year, while China’s H shares listed in Hong Kong are up almost 8 per cent.
In one indication of easing liquidity conditions, the benchmark Shibor interbank rate fell to its lowest point on Thursday since April 2009, a time when Beijing was rolling out a Rmb4tn ($582bn) stimulus package that led to a giant stock market boom. The People’s Bank of China (PBoC) then, as now, was injecting money into the financial system.
So can investors expect a 2009-style equity boom, when the market leapt 80 per cent? The importance of the question goes well beyond China. The sharp pick-up in June in capital flows into emerging markets was driven largely by China, according to the Institute of International Finance, which estimated a net inflow into Chinese equities of $5.8bn, compared with a net outflow of $8.7bn in May.
Nevertheless, analysts said, it would be rash to expect a rerun of 2009 or even of 2014, when the market rallied 50 per cent before spiking another 50 per cent by June 2015. “We actually think that policymakers are likely to remain pretty restrained, so prepare for another phase of disappointment at some point,” said Mr Gatley.
A Chinese economic official concurred. “It is very unlikely we will see a general monetary stimulus like we saw in the past because of the danger that that would inflate housing prices even more and cause consumer debt to climb to unsustainable levels,” said the official, who declined to be identified.
More likely than a general flooding of the economy with cheap money are judicious moves to shore up financial vulnerabilities where they occur, analysts said. One caveat to this: if the Fed cuts rates in July, China may be obliged to follow suit to avoid an unwanted strengthening in the renminbi’s value against the dollar.
But the absence of a general stimulus will not deprive certain parts of the economy of a boost. Consumer spending is set to pick up after reaching record-low levels this year, says Bo Zhuang, chief China economist at TS Lombard.
China’s ministry of commerce concurred, projecting this week an 8.2 per cent rise in retail sales in the first half of the year, up a touch from 8.1 per cent over the first five months. Such a small uptick may seem insignificant, but against the dismal numbers that China has been recording in several parts of the economy in the first half of this year, it stands as something of a reprieve.
Passenger car sales declined almost 15 per cent in May from a year earlier while imports dropped 8.5 per cent in the same month. Home sales also stuttered, rising just 8.9 per cent in the January-May period, slipping a few percentage points from the pace in earlier months. There are signs that Beijing is starting to take some action, making it easier, for instance, for people to buy car licence plates.
With consumer spending contributing roughly two-thirds of gross domestic product, any evidence of steadying fortunes could assist the outlook for consumer stocks. The fallout from a peer-to-peer lending crisis last year that damped retail activity is also slowly wearing off, analysts said.
In addition, stock valuations may provide some support. The stocks included in the Shanghai Composite Index are valued at 10.7 times their average projected earnings over the next year, below the 10-year average of 11.7 times. That makes China less expensive than the US, for example, where the S&P 500 index trades at 16.8 times, above its 10-year average.
But overall, analysts warned, recent signs that tides of liquidity are rising does not portend a return to the glory days of 2009 or 2014-2015. Investors hoping for a flood of cheap money to lift all boats, perhaps as a display of defiance to Donald Trump, are likely to be disappointed.