Australia | Aug 20 2009
By Greg Peel
In January 2006, the ASX 200 was at 4800 and the Shanghai Composite was at 1200 (I’m using a bit of rounding here). In August 2007, the ASX 200 peaked at 6800 for a 42% gain from end-2005, while the SC peaked at 6000 for a 400% gain.
The SC was the first to trough – in October 2008 at 1700, having fallen 72%. The ASX 200 troughed in March 2009 at 3150, down 53%.
The SC then ran to 3450 last month for a 103% gain while the ASX hit its peak this month at 4450 for a 41% gain. As at yesterday, the SC was down 19% from its peak to 3450 while the ASX was down 1.8%.
But it’s that 19% fall that has everyone spooked. Despite the fact that the numbers above show that the Shanghai stock market clearly displays greater volatility by a considerable multiple. One might also note that while the ASX 200 was 9% lower yesterday than end-2005 the Shanghai Composite was 187% higher.
What started this all off were comments made by China Construction Bank President Zhang Jianguo on August 6: “We noticed that some loans didn’t go into the real economy,” and “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast and housing sales are growing too fast”.
Zhang was referring to loans made by Chinese banks such as his under duress from the government to take advantage of a low central bank cash rate and lend into the domestic economy. This is all part of the Chinese government stimulus package, which clearly is designed to stimulate business and construction investment. It is not designed to finance property and stock market speculation, but as Zhang points out that’s what’s been happening, at least to some of the funds.
And so we have had a rally over 100% in the Chinese stock market from the post-GFC low, followed by a 19% pull-back to date. The pull-back has occurred because Zhang’s comments led to fears the government would tighten monetary policy as a response to an overblown market. Then yesterday the fear was the government wouldn’t step in to save a now falling market. The average Chinese is not a very experienced investor from the capitalist point of view. He or she still expects a communist influence of a Glorious China in which the government ensures a stock market must always rise.
BTIG’s chief market strategist Mike O’Rourke echoed the feelings of many in the West in his daily report this morning when he noted:
“A market that is up 110% has corrected 20% and now the market is placing the entire recovery there in doubt. Beyond the simple fact that markets that make such runs need to correct, market participants are well aware that China has stockpiled tremendous amounts of materials, which will go into projects, so all the money did not go into the stock market. Simply stated, a stock market correction does not necessarily translate to China’s recovery being off track”
In other words, a pull-back in the volatile Chinese stock market is not something to be feared on the basis it indicates the recent Chinese recovery is now over. It is simply a necessary correction from an overheated and cheap-money-fuelled bubble. O’Rourke points out that stimulus funds have also flowed into commodities which will be used to supply the infrastructure stimulus projects ahead – projects that will ensure a level of ongoing demand and Chinese domestic economic growth.
All Australia has to fear in the short term is that Chinese stockpiling of commodities has reached its limit for the time being, and that commodity prices are due a short term pull-back after astonishing surges.
But on the point as to whether the Chinese government might step in to save the stock market, the Wall Street Journal yesterday raised another popular point – don’t forget October 1.
The Chinese government should, all things being equal, be happy the stock market is deflating somewhat. The risk was that the more it bubbled, the more spectacular would be the bust, and that’s not very helpful when you’re trying to stimulate the domestic economy and prop up the global economy at the same time. However, October 1 is the sixtieth anniversary of Communist rule in China, and a very big party is planned. If the Beijing Olympics are anything to go by, that party will be one designed to illustrate Chinese superiority to the world.
It is unlikely the government will let the stock market crash before October, and maybe it would prefer a higher index level by then. Hence there is some agreement around the market there is very little to worry about before October, even if a 20% or greater correction is really nothing to worry about anyway.
What might be more worrisome is that after the big party the government might decide it should, indeed, let some air out of the stock market. And let it out in that historically fateful month known as “October”. Chinese analysts point out the government did exactly this in late 2007 when it tightened monetary policy too quickly in the face of rising price and asset inflation, and a 73% drop transpired. It will not make the same mistake again. This time, it will take an even more softly-softly approach than is normal for the Chinese government.
The conclusion thus is: if there is anything that might take the Australian stock market back to test the March lows, it won’t be something coming out of China.