Thursday, August 2, 2012

Shanghai Composite at 41 Month Low


The Shanghai Composite Index moved lower in back-to-back sessions to a fresh 41-month low at close yesterday, settling just above 2,100. The large-cap focused CSI300 of the top Shanghai and Shenzhen listings moved into negative territory year-to-date.

Economist Jian Tianlun says structural problems continue to plague the Chinese economy. And China’s current economic situation is similar to that in the early 2009 financial crisis, perhaps even worse.

 [Economist Jian Tianlun]:

"I think it shows a lot of things. The stock market is a leading indicator of the economy. Even the China stock market is a policy market, now stock market capitalization accounts for about 55% of china"s GDP. So in this case, China"s stock market is an indicator of China"s economy in the next several months or year.”

Both the large-cap focused CSI300 index of companies in Shanghai and Shenzen as well as the Shanghai Composite fell more than 5 percent in July. This brings their losses to more than 11 percent since the beginning of June. This is despite two interest rate cuts and steps from Beijing to boost investor confidence, which has exceeded measures taken in the 2009 global financial crisis. In the mean time, there are only 56,450,000 accounts holding equities of A shares in the market as of last weekend. This is a decline of over 70 thousand from the week before. The percentage of empty accounts has increased to 66%, showing a strong decline in confidence in the market.

Jian Tianlun says the market has become diluted since 10 years ago large state owned enterprises could only allow 30% of their shares to be sold to the public. Now 70% of their shares can be sold.

[Economist Jian Tianlun]:

“Lots of investors, actually the individual investors have gotten out of the market. I think one reason is that during the last ten years, the Chinese stock market has not grown. The growth rate is almost zero. Even Chinese GDP has grown 10% each year on average of the last 15 years. But people in the stock market haven"t gotten any benefit. Actually most of them are losing money. Why? One reason is lots of Chinese state own enterprises issue new stocks that increase their market capitalization. Also, for banks of China, the largest state owned enterprises, it seems they issue new stocks when they need money. So the capitalization has increased. And also ten years ago, Chinese stocks can be purchased only accounts 30% of listed capitalization, listed stocks, right now government  increase the stocks that people can purchase, for instant, the state own enterprise, now 70% of capitalizations, in terms stocks of people can purchase, buy, so in that case, decrease the value of the stock, diluted investors value, this way investors are losing money  ”

But China"s securities regulator claims that the decline is partly driven by panic. And they say pessimism over a slowdown in the domestic economy may be overdone.

Economist Jian Tianlun believes that the engine driving China’s economy is sputtering. Exports and investments, the main forces driving China’s economic growth, are slowing. Until recently, real estate was a powerful driver that pushed economic growth, but it is also weakening. So all three aspects are in decline.

[Economist Jian Tianlun]:

“In the last 3 or 4 months, CPI and PMI have both been decreasing. These are all similar to early 2009. What is different is that in 2009 China invested 4 trillion yuan into the market to push the economy. Now they can"t do that anymore, because so much investment created a housing bubble, and also over-capacity in manufacturing, and lots of empty buildings and highways that are not used. Using investment to stimulate is not an option anymore. What they can do is lower the interest rate. Chinese investors are fully aware of these trends. This is why they pull out their money.”

Compared with the same period last year, the Consumer Price Index has dropped for three consecutive months, and the Industrial Commodity Price Index has dropped four months in a row. All very similar to the situation in 2009.