Hopes that China’s stock markets have finally shed their multi-year losing streak may have been dashed again. Since February 6, just before China’s New Year holiday, the Shanghai Composite Index has slumped 5.6 percent. That follows what had been an encouraging 20 percent-plus rise in the couple months since the market reached a dismal four-year-low, last December.
Is the most recent downturn a comment on the reform credentials or abilities of China’s new leaders, Xi Jinping and Li Keqiang? Or does it say something about the skills of the recently appointed chairman of China’s securities regulator, Xiao Gang, previously at the Bank of China? Or is the market slump an omen of a coming downturn in the overall economy?
Probably none of the above. In reading China’s sometimes inexplicable stock market movements, it’s important to keep several features of the markets in mind. The first thing to know: with some 80 percent of the market driven by individual retail investors, never underestimate the role of policy pronouncements or downright speculation; they are key market-movers in a country that has a still heavily state-dominated economy, and a robust, rumor-fueled blogosphere.
This situation is different from more developed bourses, such as in the U.S. where institutional investors dominate, points out Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong. “Definitely what drives the market is still a bit different from what it would be in mature markets. One reason is due to what kind of investors are most active,” says Kuijs. “In China we have a larger weight of retail investors who simply don’t look as much at fundamentals as institutional investors do.”
“More than 90% of the population reads the same news reports, so major policy announcements and reform programs can trigger large emotional market reactions,” wrote Singapore-based Mark Mobius, executive chairman of Templeton Emerging Markets Group, in a blog on January 30, before the latest selloff.
The latest slump seems to have been sparked by reports that Beijing will clamp down on the property market, by tightening rules on mortgages and enforcing a profit tax on sales of secondhand apartments. That explains why property stocks, down 11.5 percent since Chinese New Year, along with financial stocks, have been the biggest losers in the latest slump, according to London-based Capital Economics.
“The trigger for the declines appears to have been a move by the government to tighten implementation of property controls, along with hints that monetary policy is shifting towards tightening, amid concerns about rapid credit growth,” writes Qinwei Wang, China economist at Capital Economics, in a March 26 note.
And even though the 79 listed property developers make up only 3.1 percent of the Shanghai Composite’s total market cap, the sector punches way above its weight when it comes to its impact on the exchange, as well as the larger economy, says RBS economist Kuijs. That’s because of the knock-on effect real estate has on other industries, including basic materials like steel and cement, as well as on the financial sector (financial companies make up the largest share of market cap with 37.05 percent of the total.) “If property developers fall, then people start worrying they can’t repay their loans to the banks,” explains Kuijs.
Despite the fears of a real estate clampdown (the property sector makes up one-quarter of all investment in China), some are optimistic that long-term trends will be good news for China’s bourses. “It’s our expectation that, as disposable income increases for China’s middle class, more personal assets could be funneled into savings and investments,” wrote investment adviser Mobius.
“Many consumers in China have been benefiting from annual increases in wages of 20% or more. In addition, urbanization is continuing apace with the government devoting more resources to infrastructure and subsidized housing as well as extending social security, education and health benefits to new migrants to the cities,” wrote Mobius earlier this year. “My team and I think the outlook for China’s stock market under its new leaders looks bright, and plan to go along for the ride.”