The big news of the week was a determined effort by the Center to deal with the continuing slump in China stock prices. The measures taken included, says Bloomberg, an order from the Center to major SOEs to move $280 billion, that’s equivalent to RMB 2 trillion, from their offshore accounts through the Hong Kong Connect into the China stock market. HK Connect is a share purchase mechanism through which international investors can buy and sell China A-shares through the Hong Kong exchange. This raises all sorts of interesting questions and issues, which we will consider in this week’s missive.
For the past two decades, China’s main stock index has with only two brief exceptions, basically gyrated between 2000 and 3000. There was a moment in 2007 and again in 2015 when stocks were well above 5000, but that was followed by precipitous falls back down into the 2000s. US stocks, meanwhile, have gone up solidly. The DJI index average in 2004 was around 10,000 and today it is 38,000. The Shanghai index in 2004 was around 1,500 and today it is 2,900. The extent which a stock market index is reflective of a country’s economy is always a question, but there is strong evidence to suggest that China’s is less connected than most western stock markets. And while the DJI number may not be totally reflective of reality either, but embedded within the 38,000 is the entire digital revolution — Apple, Microsoft, Google etc. The Shanghai market is also certainly more open to influence from non-market forces and the SOEs have long dominated it. A stock market should be as accurate a reflection of the economy as possible, and if it is, there is a stability to stock prices. But if it is true that the Chinese economy is facing significant problems, and that the prospects for the next year and more are not rosy, then using precious forex to support prices at the current level could possibly be a questionable strategy. The stock market is one of those few places where the Center does not have full control — it is where the rubber hits the road, and investors can either buy or they can sell. And limitations on selling simply encourage more of the same.
The next interesting element of the plan is that it is the big SOEs which are being required to cough up the cash to bolster the market. There are estimates based on complicated data tea leaf reading of foreign exchange announcements, particularly by Economist Brian Setzer, which indicate that the SOEs in total have around $2 trillion parked offshore. It is interesting that the Center appears to be using this stock market situation as a way of getting the SOEs to repatriate their money, and also interesting that they are using Hong Kong Connect as a way to do it, providing a boost, however temporary, to the Hong Kong exchange.
Of course, the way the China markets work, it could be that the announcement by the Center of support for the markets will encourage other players, including the millions of daytraders who follow official announcements, to leap in ahead, thereby making the investment in SOE funds possibly less necessary. But this game has been played many times before and this is a shaky market right now, because of the basic lack of confidence in the future which is being exhibited by investors and consumers alike. While the Shanghai market index went up on Thursday, on Friday it drifted up and down around the starting mark. Presumably, because every time there is a jump in pricing, some investors see it as an opportunity to exit in the belief that the longer- or medium-term prospect is not so great.
Overall, the $280 billion can definitely squash a few short sellers, but if the investment is not coupled with economic policies that shift the confidence needle, then it is hard to see how it has any even medium term impact. Premier Li Qiang this week called on officials to “vigorously improve the quality and investment value of listed companies, increase the entry of medium and long-term funds into the market, and enhance the inherent stability of the market,” Xinhua reported. But that is easier said than done. What kind of bold announcement could result in a market sentiment U-turn?
What a good question to ponder in the coming weekend, which we hope all enjoy.