Do not underestimate China

By last Monday the Chinese stock market as measured by the Shanghai A Index was down by nearly 14 percent since the end of September despite Chinese regulators and leaders having announced more stimulus measures such as major tax and fee cuts in mid-October. Photo: AP

By last Monday the Chinese stock market as measured by the Shanghai A Index was down by nearly 14 percent since the end of September despite Chinese regulators and leaders having announced more stimulus measures such as major tax and fee cuts in mid-October. Photo: AP

Published Oct 31, 2018

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JOHANNESBURG – By last Monday the Chinese stock market as measured by the Shanghai A Index was down by nearly 14 percent since the end of September despite Chinese regulators and leaders having announced more stimulus measures such as major tax and fee cuts in mid-October. 

It is also rumoured that the Chinese government and government-linked institutions are intervening in the Chinese stock market to prop up prices to save Chinese investors.

Economic growth has surprised on the downside while growth in the manufacturing sector has stagnated. Fung Business Intelligence (www.fbicgroup.com) sees a further moderation in China’s economic growth rate due to weaker exports and softer domestic demand amidst poor consumer sentiment.

The additional measures and market interventions come on top of the measures announced in July this year to weather the trade war with Washington by boosting domestic demand. 

According to Fung Business Intelligence one of the major measures is to accelerate construction of infrastructure by urging local governments to speed up the issuance of 1.35 trillion yuan of special bonds and the use of funding obtained through the bonds. 

China’s central bank (People’s Bank of China) also cut the reserve requirement ratios of some financial institutions. The recovery in the Chinese and other Asian markets were short-lived, though as the markets resumed their downtrend.

Market interventions

The challenging question is whether the pump-priming measures by the Chinese authorities and market interventions will be able to steady the ship and stop the plunge in the Chinese equity market as well as the rout in global equity markets.

I have identified four instances in the recent years when massive stimulus measures were announced by the Chinese authorities and when they intervened in the Chinese equity market.

The measures introduced in October 2008 at the height of the global financial crisis caused by the demise of Lehman Bros were successful as the damage to the economy was limited. While the manufacturing sector contracted over the next 4 months it started to resume growth in March 2009. 

The Chinese stock market bottomed near the levels when the intervention and announcement of the measures happened. The Chinese stock market rallied by 43 percent and 73 percent respectively over the next six and 12 months from October 2008’s lows. 

Over the same periods emerging markets (as measured by the MSCI Emerging Market Index) rose by 16 percent and 60 percent respectively in terms of US dollars while developed market equities (as measured by the MSCI World Index) sank by 6 percent over the six-month period and climbed by 16 percent over the 12-month period in terms of US dollars. 

South African stocks as measured by the FTSE/JSE All Share Index increased by 14 percent and 57 percent respectively in terms of US dollars and 0 percent and 29 percent in rands as the local currency strengthened.

In April 2014 China announced a stimulus package to arrest a slowdown in its economy. The Chinese stock market bottomed when the stimulus package was announced and rallied by 19 percent and a massive 119 percent over the next six and 12 months from April 2014’s lows and 22 percent and 121 percent in terms of US dollars. 

Developed markets

In contrast, emerging markets and developed markets were up 2 percent and 1 percent over the six-month period respectively and 5 percent over the 12-month period. The FTSE/JSE All Share Index was down by 3 percent and 1 percent in terms of US dollars and returned 3 percent and 15 percent in rands over the same periods.

The wild party on the Chinese stock market ended in June 2015 and while the market was crashing the authorities decided to interfere to stop the rout. When they withdrew from the market the sell-off continued. It was a hard lesson to learn.

In February 2016 the People’s Bank of China slashed the amount of cash that banks must keep on reserve to pump money into the Chinese economy. The Chinese stock market bottomed when the stimulus package was announced and rallied by 15 percent and 21 percent over the next six and 12 months from February 2016’s lows and 13 percent and 15 percent in terms of US dollars. 

Emerging markets and developed markets were up 21 percent and 11 percent over the six-month period respectively and 26 percent and 19 percent over the 12-month period. The FTSE/JSE All Share Index was up by 15 percent and 25 percent in terms of US dollars and returned 8 percent and 6 percent in rands over the same periods.

The current scale of the stimulus measures and possible market intervention is such that it reminds me of China’s action during the global financial crisis in 2008. What it does tell you is that the fall-out of the escalating China-U.S. trade war on the global economy could be much worse than investors and politicians anticipate – at least, that is what the Chinese government expect, fear and planning for. 

My take is that Beijing will be able to keep the ship afloat in this trade war with Washington and its actions are likely to eventually rub-off positively on emerging markets and China’s BRICS partners. 

Ryk de Klerk is an independent analyst: Contact [email protected]

The views expressed here are not necessarily those of Independent Media.

BUSINESS REPORT ONLINE

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