Is China's Stock Market Nearing a Bottom?

There are conflicting reports about the Chinese government’s intentions towards the stock market. On the one hand, Premier Wen said Sunday, during his visit to Laos, that the Chinese government will make efforts to promote stability in the development of its stock market. According to the Xinhua version of his speech:

The government has two major responsibilities. One is to maintain stable and fairly quick economic development without sharp fluctuations, and concentrate on solving the outstanding problems in economic life. The other is to establish, through legal means, an open, fair and transparent market environment so as to protect the interests of investors and small shareholders.

Premier Wen’s positive comments, however, were not enough to overcome the perceived lack of action on the part of the government. Monday, the Shanghai market closed down just over 3%, finishing off an awful three months with the market down 29%, which is apparently the worst quarter on record. A report on Bloomberg quotes a pretty common reason given for the continued decline:

“Expectations were quite high that the government would announce market-boosting measures over the weekend,” said Fan Dizhao, an analyst of financial companies for the Shanghai office of Guotai Asset Management Co. which manages about $8.5 billion. “The market sentiment has been hurt in the absence of regulatory incentives.”

Needless to say, the perception here is that everything hinges on government actions. If they move to shore up the market, it will rise, and if they don’t, it means they want it to decline and it will decline. It is hard to argue that China’s stock market is still at bubble-level prices – they peaked in November at nearly twice the current level – especially given that corporate earnings kept growing for the most part. Last week, in its monthly release, the National Bureau of Statistics had this to say about industrial profits, in what has been an admittedly difficult period:

From January to February, the industrial enterprises above designated size (all state-owned enterprises and non-state-owned enterprises with an annual sales over 5 million yuan, same as follow) reached 348.2 billion yuan, rose by 16.5 percent over the same period of the previous year.

More importantly than the growth in reported earnings, say some insiders, is the growth in tax payments which, according to the same release, were up 24.8%. At these prices it is easy to make the argument that A-shares are fairly valued, and B-shares, at little more than half the level of A-shares, are positively cheap. Still, the main driver of investment decision continues to be the government’s intentions, and looking for value continues to be a mug’s game.

This is the not-unexpected consequence of years of meddling in the market to drive prices up or down according to whatever the latest current political concern may be. I suppose that we may see a little more weakness before the government decides that one way to bring good cheer back to pre-Olympic Beijing would be to have a couple of great months in the stock market. Certainly the market has recently been flooded with rumors – usually a good indication of what the government is thinking – about the need to take action.

Comments

[olympicdai]

I totally agree that the china market needs a couple of great months in the pre-Olympic period. Under the current situation, it seems it would only happen when the government makes a series of favorable policy changes - since at least half of the individual investors (which represent a big portion of trading volume) will not stay as soon as there is a chance to get out, according to a recent survey.

Investors need confidence, which may be re-built, in my view, only through either constant and strong government intervention on the market, or through a well-accepted believe that the market is almost completely free. Otherwise, the market would stay very speculative for a long time. - Unfortunately we are not seeing any sign of change.

[davidinchina]

I would have thought there was potential for the market to go down a lot further. As you yourself have pointed out numerous times inflation is going to be a major issue in the coming year and the government is also trying to bring GDP growth back to a more sustainable level. Raising interest rates and tightening credit are logical ways to do this and would be detrimental to both the stock market and real estate.

[rainman]

Please try to understand the Chinese term of "Xiao Fei" and "Da Fei" before you even trying to explain what is happening there.

[paultaut]

The Chinese market is quickly approaching a Fibonacci retracement number. Inflation will not go higher...the Gov. has issued price controls...they have the power to enforce this.

This is the Year of the Rat, their stock market will go up even if the goverment has to buy individual shares of every listed stock....but buying into a few majors will do it...they do not want to enhance internal discontent at the same time as external tensions rise.....alla Tibet.

[kkin365]

You mentioned "the perception here ...." Exactly to what are you referring? Doe "here" mean USA? If so, you have been spoiled by Fed -- you are relying too much on the government -- U.S., of course -- to bail you out, and expect other governments to do the same. Perish the thought.