Chinese Investors Sentiment is Very Weak, Conditions Abroad Have Little Influence
$ALMMF, $CHL, $PTR
- Market sentiment is very weak.
President Xi’s government is struggling to dispel such gloom and talk stock prices back up with promises of tax cuts, more bank lending and a media campaign.
The benchmark Shanghai Composite Index sank 30% from January through mid-October. Prices fell so far that China gave up its status as the #2 market by share value after the US, and dropped to 3rd place behind Japan. The index has gained 5% since late October but is the world’s worst performer this year, down over $4-T in value.
The slump adds to challenges for Communist leaders as they try to shore up economic growth and carry on a tariff dust-up with President Donald Trump over Beijing’s tech policy. It also put a wrench in plans for state industry to use share sales to pay down a multi-billion-dollar mountain of debt and modernize.
China’s equity markets are unusual among large countries.
They were created to raise money for state industry, and they have a growing number of private firms but still are dominated by government companies such as Crude Oil giant PetroChina Ltd. (NYSE:PTR) and China Mobile Ltd.(NYSE:CHL), the world’s biggest phone carrier.
Prices react to policy changes instead of economic performance.
Conditions abroad have little influence because Chinese markets are kept walled off from global financial flows. A handful of US and European financial firms have been granted the status of domestic investors since Y 2002, but the main class of “A” Shares is off-limits to most foreign investors.
The latest price decline began in January after Beijing clamped down on bank lending to rein in surging debt.
Shares in real estate and other companies that thrive on credit were hit hard. Aluminum Corp. of China (OTCMKT:ALMMF), a major building materials supplier, off 52%. China Vanke Co.(HK:2202), a developer, is off 40%.
The economic downturn brought on by credit controls was more abrupt than Chinese leaders wanted, prompting them to reverse course and tell banks to lend more. They promised tax cuts and other help after economic growth slumped to a post-global crisis low of 6.5% over a year earlier in the 3 months ending in September.
The impact of those measures has yet to show up in the nation’s economic data.
Market sentiment is very weak.
China’s stock markets have ridden a boom-and-bust roller coaster since 1990, when the first exchange since the 1949 communist revolution opened in Shanghai. A 2nd exchange followed the next year in Shenzhen, near Hong Kong.
Since I have been following them, prices soared and slumped in Y’s 2001, 2008 and again in Y 2015.
Despite that, small investors piled into stocks.
The number of individual Chinese trading accounts nearly quintupled between Y’s 2006 and 2017, hitting 192-M, according to the Shanghai Stock Exchange’s annual report.
Individual investors owned about 21% of the market as of the end of Y 2017, or shares worth 5.9-T RMB Yuan ($842-B), according to the Shanghai exchange.
Investors already were fearful after the Y 2015 price collapse. Then, Beijing shoveled billions of dollars into stopping the slide and suspended plans for stock offerings by state-owned companies
Regulators have tried without much success to encourage investors to shift from rapid-fire trading to holding for the long term. The Shanghai exchange said individual investors accounted for 82% of its daily trading volume in Y 2017, little changed from prior years.
Instead, regulators are gradually allowing in more foreign buyers in hopes they will provide ballast as long-term investors.
Since Y 2014, foreigners have been able to buy some “A” shares through Hong Kong.
In July, regulators announced foreigners working in China would be given access to the whole market.Now, investors worry about a possible new downward spiral if prices of shares pledged as collateral by companies for loans fall far enough that banks and brokerages might seize and sell them to recover their money.
The government tried to allay those fears by announcing on 19 October that Chinese insurers would be allowed to create units to buy such shares temporarily to keep them from flooding the market.
The same day, officials led by Vice Premier Liu He, President Xi’s Top economic adviser, launched a media campaign to talk prices back up. The central bank governor, Yi Gang, was quoted as saying “economic fundamentals are good.” Liu said cheaper stocks created “good investment opportunities.”
“I welcome the government’s efforts to support the markets,” said Li, the retired hotel executive. “But as for whether that is effective, I really don’t know.”
The Shanghai index gained 4% after the ruling party leadership promised on 31 October to “intensify reform.” That prompted expectations of further easing in lending controls.
President Xi followed with a 1 November speech that promised tax cuts and other help to entrepreneurs that generate new jobs and wealth.
We here at HeffX-LTN see that as an affirmation of the importance of private business on complaints state industry is a drag on the economy.
Some investors gained confidence after the government issued supporting policies. More will come when and if Presidents Trump and Xi align trade polices at the end of this month at the G-20 meeting in Argentina.
Have a terrific weekend