Just exactly what the Shanghai stock market index reflects is not entirely clear, but it is certainly not an equivalent of the Dow Jones index in New York, and the extent to which that is reflective of the state of the US economy. This is a very different market. The way in which it operates, the motivations of investors, the nature of the key players, the impact of government policy—all these are different. And the result? Over the past 20 years, the Dow has gone gangbusters, and the Shanghai stock index has basically gone up and down but remained pretty much in the same place. Why? Transparency and rules-based structure, perhaps? The same is true of the Hong Kong stock exchange, which used to be international and trended roughly in line with other global markets, but now trends generally in relation to the China financial system.
But the Shanghai stock index has a psychological impact, and is one of the numbers that are watched, just like the exchange rate for the RMB and the reported GDP number, as having a significance in terms of the perspective of investors, and as an indicator as to the overall state of the economy. We are heading towards the NPC next month, the Liang Hui, and Those in Command seem to have decided that the stock market index number during that must start with a 3. The Shanghai Stock index has been falling for a year or so, from 3300 last March to around 2700 a month ago. But then a concerted effort by what is known as the National Team, that is basically state financial institutions, who invest in stocks in order to push up the index, has pushed it back over the past a few weeks to more than 3000. But it is a tussle because there is significant selling pressure due to the fact that many people are feeling uncomfortable about the overall state of China’s economy. So every time the National Team pushes the share prices up, there is selling into that which brings the index back down again. It is a roller coaster ride around a certain number and that certain number is 3000.
There has been a significant retreat of foreign money from China’s capital markets over the past six months and more, and there are other domestic players who seem interested in exiting their holdings in the market. So where will the Shanghai stock index be in three months, six months or one year? How long can the National Team continue to operate in this way? How much money do they have, and how much money wants out? Of course, there are many things that the system can do to offset the desire of private investors and foreign investors to exit the market. State insurance companies, and other players are being authorized to set up equity funds, and that’s fine, except that it means that, as with the housing market, the overall ownership by the state or by proxies of the state, grows and grows.
So with this battle taking place on the stock market as to what the closing number will be every day, how are things on the ground? The answer is that with some exceptions, not good. One driver we asked how their business was going, replied: “It’s an economic crisis.” Strong words, and superficially, it doesn’t necessarily feel like a crisis, but the overall slow down in economic activity, and the general sense of pessimism about the future are definitely weighing on the market. People are looking for a clearer message with regard to the policy direction that the Center wants to follow. The emphasis over the past year and more has been on national security rather than economic development, and through explicit or implicit means investors and business people have indicated that they would love to go back to the Dengist approach of real encouragement of enterprise. And so the pronouncements of the NPC next month will be analyzed with great care to get a sense of the stance on the economy. The word on the street is that the economy will be the main focus of the NPC, and quite right too. On the other hand, this week saw a new call from the Center to all party branches, urging officials to re-double their efforts at instilling the main ideological line deep into the minds of party members. For officials trying to work out what they should be doing and how they should be addressing the various issues they face at the local level, it must be confusing. One small indicator of just how things are with the economy maybe a report from Guizhou, where a state-owned company has issued bonds to provide financial assistance to an LGFV—a local government financing vehicle, the kind of entity which is central to the massive debt problem facing local governments across China—to which it had no previous business links. Weird.
Have a great weekend as you bate your breath for the Liang Hui.