Chinese stock market sell-off might be far from over
Although Beijing might be cheering the swift rebound in the A-share market after the worst rout in seven years, its nightmare may not be over.
In terms of valuation, a 30 per cent correction is not enough to justify the doubling of the A-share market price between October and June in an economy that is slowing down.
More importantly, the rescue measures by Beijing in using the most extreme administrative measures to intervene in the market could hurt stock price performance in the longer term as those steps represent a huge set back in cultivating a healthy onshore capital market.
Some bearish bets have been placed by some of the world’s biggest asset management firms.
In a note to its clients on Wednesday, Junheng Li at New York-based JL Warren Capital is forecasting the Shanghai Composite Index to fall to the pre-rally level of between 2,000 and 2,500 in the next six to 12 months. The view was echoed by AXA Investment Managers which said the China market may shed another 20 per cent from its current level.
“Halting IPOs (initial public offerings) is damaging to the development of financial markets in China and to the greater role for market-driven allocation of capital. SOE (state-owned enterprises) dinosaurs will love this development,” said Li.
“Suspending the trading of a large number of stocks is a major defeat for the market regulator supervisors. Bullying a number of domestic financial firms and rich individuals into not selling stock and/or purchasing stocks they would not have voluntarily held or bought is a confidence-undermining demonstration that the state will not try to manipulate stock prices.”
Calling the market-saving efforts “a huge set back in the course of market reform”, Li worried that those efforts in the longer term could post a severe drag to Beijing’s reform agenda in capital account liberalisation and yuan internationalisation, which hit market sentiment and post real threats to economic growth.
“Zhou Xiaochuan, the governor of the Chinese central bank PBOC, is a leading proponent of financial liberalisation. Therefore his agenda has seen a setback. But the main damage has not been to the PBOC, but to the regulators – especially the CSRC, the CBRC and the China Securities Finance Corporation,” said Li.
The short-term cost of having such a boom-and-bust cycle in the equity market is a drag of between 0.2 percentage points and 0.4 percentage points to Chinese economy growth over the next six months, assuming that the fiscal response from the authorities does not go far from expected, according to AXA. The relatively limited damage to the real economy has left room for the regulators to allow sharper declines.
“Even if authorities have not made up their mind about their pain threshold, it seems to us that a further 20 per cent correction is a reasonably gloomy hypothesis, although not a truly worst case scenario,” said AXA economists led by Eric Chaney in a research note.
In the last bubble boom-and-bust cycle in the A share market , the Shanghai benchmark rose 225 per cent between June 2006 and December 2007 and then fell by 65 per cent until it reached a bottom in December 2008. In comparison, the 20-month rally that sent the index to 5,166 on June 12, looks “modest” with its 105 per cent rise, said AXA.
