Saturday 6th Dec, 2014 – 15:00 HKT
Apologies for the puns, especially as these are now the target of China’s media regulator SAPPRFT. A shame as mandarin is loaded with homonyms, providing plenty of ammo for Chinese netizens’ cutting online humour, and providing pitfalls for foreigners learning Chinese*. But the sharp 9% increase in China’s A-share prices this week isn’t based on fundamentals, and has been happily stoked by the Chinese media. So rather than translate one Chinese article, this post is a round-up of the unusually high number of stock market stories this week that have deluged Chinese finance media, including those that Western media have missed.
The main giveaway for this sudden stock market rise and media support can be found in the timing. Back to Nov 17th, and the much anticipated Shanghai-Hong Kong Stock Connect opens to great fanfare and the first day finished with the total northbound bandwidth fully utilised. But not again after that, as it became clear foreign investors this year are far more wary on China’s economic outlook, with a property slump, poor industry performance and the threat of shadow banking collapse weighing on investor’s minds.
This wasn’t part of the ‘Chinese Dream’, which was no doubt hoping a boost to its flagging stock market would distract attention from China’s economic woes. In fact the slow start was nothing short of an embarrassment, and as is the case in China where the economy must first fall in line with government policy, action needed to be taken.
Hence the PBOC was forced to cut interest rates on Nov. 21st, and this seems to have been the spark for retail investors rushing into A-shares. In one article from Chinese media earlier this week, Li Daxiao, research head at Yingda securities cited this rate cut and two other reasons for the bull market, “more flows into the market via the Shanghai-Hong Kong Stock Connect, and a recovery in blue-chip valuations”. The problem is these reasons are weak and counterintuitive given China’s current economic slowdown. As this local report notes, China’s PMI fell in November. Furthermore SHIBOR actually rose post the rate cut, hence rumours now circulating that the PBOC will follow with cuts to bank’s reserve requirement ratios. But this is no surprise, where the stock market has never really correlated with the economy.
Both domestic and foreign media picked up on the record transaction volumes, and foreign ETF investments into the China market, but only the domestic media is asking where did all the funds come from? It’s reported that shadow banks (and even commercial banks) and their wealth management products will be the biggest losers short term in this bull run as many investors have pulled funds from these products and piled into the stock market. The knock on effect would therefore be less funding to China’s real economy, a worrying prospect, when Chinese firms are already facing a liquidity crunch at the end of this year. Will there be reports of more shadow banking collapses post this bull run?
Whilst Western mainstream media has yet to pick up on this point, another point raised in domestic media, is where does this leave the shadow banks? Well as nimble as ever, operating in the grey areas of China’s financial regulation, they’re helping Chinese retail investors dive in with more cash! Margin lending, or as Chinese shadow banks call it ‘peizi’, is now the latest craze to hit the market, whereby shadow banks (in addition to the usual securities houses) match customers capital with their own, leveraging an investors share purchasing power.
In fact this margin lending and the herd mentality is the real reason behind this sudden rise in share transaction volumes and prices. Most of the headlines this week in the Chinese media talk of the dizzying levels share prices will reach next year, such as the A-share index reaching 5,000 points, hell even 10,000! (too many to translate here). The few headlines that try to temper investors’ appetites, such as “Don’t sell your house to gamble on shares”, only seem to add further pressure on investors not to miss out on this bull run.
There are no fundamentals to support this bull run, but that doesn’t mean one should underestimate the government’s intentions and the herd mentality in China. From a young age Chinese are raised to move with the group, whether it’s boarding trains, or scrambling to buy the latest offer at the local market. If you first pause to ask why, the opportunity has just been snatched by ten others, and you’ll know to be quicker next time. Which brings me to my favourite headline of them all “78 year old grandmother enters the stock market”. She knows nothing about stocks, but she’s on for the ride, and she just pipped you to that subway seat.
(Article not to be republished without permission or citation).
Major Chinese A-share headlines throughout the week Dec 1st – Dec 5th:
*Like when asking the waitress how much for a bowl of boiled dumplings and instead receiving a slap. In pinyin, the pronunciation would be “Xiaojie, yi wan shuijiao shi duoshao qian?”, which if the tones are not spot on, can mean ‘Miss , how much if you sleep with me for one night?’.