A-Share Market Likely to Recover First
Has the A-share market bottomed? It closed before this week’s holiday on a very positive note, rallying from a multi-year low of almost 1,800 points less than two weeks ago. Opinions are divided among investors about whether the market has tested the lows in this cycle.
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Zhang Ning
30 September 2008
Has the A-share market bottomed? It closed before this week’s holiday on a very positive note, rallying from a multi-year low of almost 1,800 points less than two weeks ago. Opinions are divided among investors about whether the market has tested the lows in this cycle.
Clearly, world markets are in turmoil. It is still uncertain how the United States government bailout will affect the market. In China, people worry about how much more the economy is going to slow and whether inflation will trend higher again.
Given current difficult domestic and international conditions, I believe price pressure has eased significantly. If inflation remains in check, we may see that the Chinese economy is near the end of its slowdown and we may not see such lows in the A-share market again.
The Shanghai stock market has fallen dramatically from its high of just past 6,000, a much worse fall than the S&P index in the US market, which is facing maybe the largest financial crisis in human history.
Even though a bubble existed before the Shanghai market plunged, the current index level has probably fully priced in a slow growth and difficult world economic environment ahead. China’s major enemy in this economic cycle had been the inflation threat, at least before the US market almost completely collapsed. So to determine whether the worst is over for the mainland market, one should think about domestic inflation and the worldwide credit crisis.
First, central government authorities had shown determination to contain inflation using monetary policy and executive measures. With wage and inflation expectations appearing to have come down, I don’t worry too much about the still-high producer price numbers. Given the dire world financial market condition, it’s all but certain that the world economy will slow, further easing China’s inflationary pressure.
Second, given the recent market Armageddon, one has to believe the US Congress has no option but to nationalise the bad loans, because it will be too scary to think otherwise.
At least the worst systemic risk is probably behind us, even though more financial institutions will probably go bankrupt. The worst two enemies of the A-share market already have been tamed.
This doesn’t mean it’s all smooth sailing. The next less-threatening twin enemies of the market are whether the mainland economy can overcome its slowing trend and how the world is going to cope with US inflation, which is the side effect of the massive bailout.
These two factors are probably going to decide how much and how fast the market is going to recover. People still disagree about whether inflation is really under control. The authorities probably will be very careful when they lower interest rates. There will be residual bouts of price pressure from freeing energy and power prices.
Earnings recovery will probably be delayed before they go down further. However, I don’t think there is a build-up of deep recession and deflationary pressure. So I believe monetary easing overall will work pretty well.
Fund managers I have talked to are still generally pessimistic. This contrarian evidence further strengthens my view that the worst is over.
The mainland market has not reacted to macroeconomic signals in the current cycle. The market kept going up when the central banks repeatedly raised interest rates. And the recent cut in rates did not stop the market from further sliding, until China Investment Corporation started to buy bank shares.
One should not be fooled by the market reaction. It’s just a matter time before everyone realises that the economy also reacts to interest rate cuts with a nine to 12-month lag.
I don’t think the current mainland economy is in the kind of liquidity trap where monetary policy will not work.
In the US, I can’t believe the amount of dollars they will print will not create inflation. It’s probably the first time the world has faced the dominant currency losing its credibility from bailing out its excessive financial market.
China will again be caught in the middle of currency appreciation and imported inflation. How Beijing is going to resolve the problem is difficult to predict.
But before it goes out of control, the US economy will likely fall into a recession and inflation will not pick up quickly.
The markets will not have the kind of foresight to worry about this. Before that, the Chinese market is likely to recover.
Zhang Ning is a fellow at the Securities Research Institute at Peking University