China Economic Review

House view: China equities headlines should swear off the language of London and New York

Writing accurate headlines on stock market gyrations can be difficult in the best of times—that is, when the causal relationships between investor sentiment and share price changes are all but certain.

That task is particularly tricky in China: Since the year began, the Shanghai Composite Index has seen some of its strangest ups and downs to date, to say nothing of the twelve months prior. But even though many of its gains were almost certainly led by companies buying under party orders – the so-called “national team” – headlines in the international press continue to treat the mainland’s stock market as if it were that of London or New York.

Take, for example, this one from South China Morning Post, published last week:

“China shares rebound – notching biggest daily gain in more than two months”

Or another, from Bloomberg: 

“China’s Stocks Halt Bear-Market Losses as Small Caps Rebound”

To readers of the Anglophone financial press, the Bloomberg headline could reasonably be said to denote the following: Smaller mainland Chinese companies listed on the Shanghai and Shenzhen stock exchanges saw their share prices climb during the trading day, with at least one benchmark index pausing from a downturn of more than 20% from a peak it had reached in the previous two months. 

But to a day trader from Wall Street or the City, these terms also connote the movements of an investor-driven market far less constrained by regulatory intervention than is now the case in Shanghai and Shenzhen: After the mainland stock bubble popped in June, regulators intervened repeatedly to prop up share prices and even imposed a ban on major shareholders selling off their holdings. When in late August the benchmark Shanghai index sank below the 3000-point mark, it then miraculously rose 5.4% in one day, then 5% the next, suggesting where regulators intended to hold the line.

For a stock exchange in the thrall of heavy state intervention – the full scope of which remains impossible to determine – the use of terms like “bear market” and “rebound” suggests to readers that the market is operating under conditions in which demand is the chief determinant of prices. The former suggests investors are losing confidence, the latter that they have regained some of it. But in a scenario where it would appear that investors – save the state – generally want to cash out, these words are likely to muddle the picture further for investors abroad.

It would be unfair to assume that every tic down by the Shanghai Composite Index marks market forces triumphing over the party’s will; nor does every upswing imply only one buyer. Some traders, for instance, might buy shares when the index sinks below 3000 in the belief that the state plans to defend that level—and in so doing deliver a boost to various benchmark indices. 

But few investors or observers would argue that its current level represents even remotely the sentiments of investors toward the true value of equity in mainland companies. Among the clearest signs that said share prices are not taken seriously is the fact that mention of individual stocks listed in Shanghai and Shenzhen has largely vanished from coverage of their respective companies. Compare that to the attention paid to Hong Kong-listed shares, which still feature regularly in coverage by international news media.

Yet if the gap in valuation between the Shanghai Composite Index and the Hong Kong Exchange’s “red chip” index of mainland companies is any indication, the former would still have a ways yet to fall if regulators truly threw in the towel on supporting Shanghai and Shenzhen-listed stocks (price-earnings ratios of which are also still well above the levels seen in other markets).

We should make clear that the news organizations cited above are not alone in short-changing the tangled regulatory framework now imposed on Chinese equities. Headlines from virtually every outfit – ours included – suffer at times from debilitating oversimplification. And indeed, both of the stories mentioned eventually provide regulatory caveats and references to the issues raised here.

But the global investor panic that followed the recent nosedives by mainland stock indices are a far-reaching testament to the fact that context in coverage begins at the headline level. Such exacting accuracy is necessary because only with a clear picture of how the Chinese equities market differs from its counterparts abroad can observers make an informed assessment about reality on the ground.