In the past two weeks, China's stock market, long the subject of neglect, became a public focus, indicating the likely arrival of a bull market period. From Nov. 24 to Dec.5, 2014, the Shanghai and Shenzhen composite indexes rose by 18.13 percent and 6.97 percent respectively. At the same time, the small and medium enterprise board and the growth enterprise market also increased. Financial, mining and real estate industries became favorites in particular. In just one week, the transaction volume of the Shanghai and Shenzhen stock markets surpassed 4 trillion yuan. Daily transaction volumes exceeded 1trillion yuan, setting a historical record.
Five months ago, there was less participation in the stock market, just like in the past two years. Does the sudden change indicate that the real economy is turning for the better or just experiencing another bubble? So who was behind the pick-up in the Chinese stock market?
The biggest power that motivated the rise was the asymmetrical interest cut by the central bank on Nov. 21, 2014. The market is expecting China to continue its interest cut policy in the first half of next year. And there is a possibility of continuously lowering interest rates. The interest cut this time is really what the financial market has been anticipating, and its leading role in the stock market is within expectations. What exceeded expectations is that the market reaction has been so fierce. There is no problem with the rise in the stock market due to the interest cut. The question is: Is the rise due to an increased macro-economic expectation induced by the interest cut or is it mainly due to speculation? The answer determines the quality of this bull market. To make a judgment, two aspects should be considered: the capital source in stock market and the fundamentals of economic development.
Where has the huge amount of capital come from to support the bull market? According to the China Securities Regulatory Commission (CSRC), from Nov.24 to Dec.4, the net sales volume of general legal-person institutions was 125.2 billion yuan, the net purchases of specialized organizations of various kinds totaled 30.9 billion yuan while the net purchases of natural-person investors totaled 65.9 billion yuan.
In this round of the market, individual investors, especially those who hold A shares with a market value of less than 100,000 yuan made more net purchases. Small and medium investors, especially those who have newly entered the market, contributed greatly to the situation. While institutional investors have been relatively restrained, individual investors, who are more speculative, crammed into the market after years of stagnancy. Information from different stock exchanges shows that individual investors began to swarm in after A shares showing signs of "making money." This basic pattern indicates that the investors in this round do not care about the basic performance of companies. Instead, they are just chasing short-term speculative earnings. The Chinese stock market should beware of the great fluctuation risk caused by changes in investors' sentiments.
On the other hand, can the fundamentals in the listed companies and the Chinese economy support this round of economic growth? According to the National Bureau of Statistics, in October, the added value and fixed asset investment of national industrial enterprises continued to drop. Besides, the PMI in November throughout China was 50.3, a record low in eight months. This means that in the coming period, China still faces great downward growth pressure. The central bank's asymmetrical interest cut at this time is mainly aimed at reducing the economic risks brought about by the decrease in economic growth. Whether it can stimulate the real economy is yet to be proven. Currently, the major reason for sluggish economic growth is that the new driver for economic growth has yet to be started, which has led to weak demand for investment and credit loans. Therefore, loosening market liquidity can activate investment to a certain extent, but it cannot resolve the root causes of economic stagnancy. The benefits of a series of economic system reforms need time to show and more reform measures still need to be carried out. As a result, the rise of the stock market is deviating from the basic economic environment.
In general, investors are hoping that in the first half of next year the central bank would increase market liquidity by further lowering interest rates, thus maintaining the bull market for a relatively long period of time. Obviously, this is too optimistic. The Political Bureau meeting of the CPC Central Committee held on Dec.5, 2014 decided to maintain the proactive fiscal policy and prudent monetary policy in the first half of 2015. This does not allow much space for the central bank to radically lowering interest rates further. In the meantime, more interest rate cuts in the latter half of the year will also mean great risks. When investment in real economy is sluggish, capital flowing into virtual economy after liquidity is loosened will increase the risk of creating a bubble. So, the hope of maintaining a bull market by continuously loosening monetary policy is most probably one-sided wishful thinking.
Besides, it is worth noting that US$2.25 billion in foreign capital has been withdrawn from China's private equity, the biggest withdrawal in three years. It indicates that the rebound in the Shanghai stock market was mainly driven by domestic investors. The contrast between domestic and foreign investors proves their different attitudes towards the market development. It is likely that the bull market will fluctuate in the future, and many individual investors are facing greater market risks.
Speculation should not be allowed to dominate China's stock market. It should be strengthened by rejuvenating the country's economic growth.
