China may be controlled by the Communist Party, which doesn’t allow free elections, but the party leadership is certainly feeling pressure from the public.
China’s stock markets have gone into free fall since hitting a seven-year high on June 7, wiping out $4 billion in valuation. Fresh monetary easing by the People’s Bank of China (PBOC), which cut interest rates by a quarter point late Tuesday and lowered bank reserve requirements to inject liquidity into the markets, failed to stop the rout, although the pace of the sell-off slowed. On Wednesday the Shanghai Composite index fell 1.3 percent, to 2,927.29, after being up as much as 4.3 percent and down as much as 3.9 percent during the session.
The fall, though much smaller than in the past few days, was the fifth straight and made for the steepest five-day decline — 22.8 percent — since 1996. China’s official People’s Daily newspaper called August 24 “Black Monday” after the Shanghai market plunged 8.5 percent that day.
The market has fallen despite numerous government attempts to prop up prices, including coordinated stock buying by state-owned bodies that Goldman Sachs Group analysts have estimated at some 900 billion yuan ($140 billion) and restrictions on short-selling and sales by major shareholders. Securities regulators announced that they’ve done enough and will leave the markets alone, but many investors and analysts find it hard to believe the authorities will adopt a laissez-faire stance. Sources say policymakers have begun debating behind the scenes the merits of additional efforts to prop up share prices.
“There may only be one opinion published in China, and that’s the government’s and the party’s,” says a senior finance editor of a major Chinese business publication in Shanghai who asked not to be identified by name. “But in reality there are more than 1.3 billion opinions that are expressed every day, and in the stock markets there are 90 million investors, and they are expressing their opinions right now. China’s growth is slowing, and it’s being felt in many sectors, and many people are just plain not happy about the situation.”
Still, many experts say the panic may be overdone. “It’s a big bargain sale,” says Kenneth Courtis, a former vice chairman of Goldman Sachs in Asia who now manages his own funds. Many Chinese equities are trading at or near all-time lows and boast annual dividend yields of 6 to 7 percent, he says. Courtis sees the Shanghai market bottoming out at around the current level of 2,900 on the composite index.
The sell-off has taken place amid increasing worries about a slowdown in the economy and concerns that margin trading had boosted stock prices to excessive levels.
China has been stepping up the pace of financial market reforms recently, including measures to allow liberal use of margin trading and short selling. “There is no question that valuations were stretched, and licensed leverage levels had grown significantly,” says Paul Schulte, who runs his own Hong Kong–based independent research firm, Schulte Research International. “But these levels of leverage by licensed brokers was within limits.”
The bigger problem, according to Schulte, was informal margin lending by unlicensed curb lenders. He estimates such lending hit 500 billion yuan before the government moved to crack down on it in June. “They should have cut off the excess leverage in April and not waited until June,” Schulte says. “But the extreme margin financing of 8-to-1 did not really become visible and public until mid- to late May. The government reacted within a few weeks.”
Chinese retail investors are “angry at the government for failing to stamp out curb lending much earlier,” says the Shanghai-based editor. “They’ve done a poor job regulating the markets.”
Some analysts, particularly outside China, distrust the official growth rate of 7 percent, citing weak trade volumes and commodity prices. But worries about the slowdown are overblown, says Wang Tao, head of China economic research at UBS in Hong Kong.
“As far as we are concerned, apart from the recent market purchasing managers’ index showing weakness again, there hasn’t been much new information,” she says. The economy has seen new signs of weakness from disappointing exports, but Wang says she believes the government “will do whatever it takes to stabilize” growth at a rate of 6.5 to 7 percent this year. She says measures could include increased government spending on infrastructure, lower interest rates and further depreciation in the yuan, which has fallen by 3.1 percent against the dollar since the PBOC relaxed its control of the exchange rate on August 11.
Late Tuesday the central bank announced it was cutting its one-year lending rate by 25 basis points, to 4.6 percent. It was the fifth cut since November. The PBOC also lowered bank reserve requirements by 50 basis points, to 18 percent of assets.
Shen Jianguang, Hong Kong–based China economist with Mizuho Securities, said the moves should support growth, help restore market confidence and reduce capital outflows from China. The moves may have only a short-term effect, he says, requiring more easing as early as October.
Shuhei Abe, chairman and president of the $8.3 billion Tokyo-based hedge fund manager Sparx Group Co., says he remains a long-term bull on China’s stock markets. “There is only one place that is creating quality new demand that is supported by emerging middle class,” says Abe, “and that is Asia. As for China, don’t expect a magical solution to come, but realize at the same time the economy is still growing between 5 percent to 7 percent annually. The rest of the world would just be happy to grow at 2 percent.”
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