China’s retail investors apparently do as they are told. First they were told to buy shares, and they went on a spree. Then they were told they had been too enthusiastic, and the buying dried up.
The conflicting signals from Chinese authorities this month have produced a wild ride, with stocks up 16.5 per cent between the start of the month and last Thursday before falling almost 2 per cent on Friday.
Last week was still the best week for the market in five years; the strongest surge in the Shanghai market since the wild credit-fuelled boom and $US5 trillion bust in 2014-15.
The initial frenzy of buying was whipped up by the authorities, with state-owned media appearing to encourage retail investors into a “healthy bull market,” perhaps hoping that (like Donald Trump) a rising market would produce a rise in consumer confidence and generate some wealth effects.
The boosterism might have been a touch too successful. Late in the week the investors were being urged to invest rationally and be aware of the risks, with reference in the state-owned media to the “painful lessons” of 2015 when, over the course of a year, the market nearly doubled before plunging 40 per cent.
The biggest increase in margin lending since 2015 might have been a factor in the attempt by the authorities to temper investors’ enthusiasm, which was also reflected in a strengthening of the yuan as foreign capital added to the demand for Chinese stocks and a sell-off of Chinese bonds.
The fundamentals of China’s economy and markets are somewhat different to those in the rest of the world and so it perhaps isn’t surprising that the performance of its sharemarket would be different to those elsewhere.
While China’s first-quarter data showed its economy had shrunk by 6.8 per cent it is expected to produce positive economic growth over the full year, albeit only an increase of about 1 per cent.
That’s still likely to be better than any other large economy, with most of the developed economies forecast to experience material shrinkage, but hardly sufficient to warrant a full-scale sharemarket boom.
China's parliament passed national security legislation for Hong Kong, setting the stage for the most radical changes to the former British colony's way of life since it returned to Chinese rule 23 years ago.
One could, however, say the same thing, in spades, about the performance of the US and other western sharemarkets, where central bank interventions and open-ended government fiscal responses to the coronavirus pandemic have produced quite a dramatic sharemarket rebound since March.
China’s stocks started falling earlier – in line with the initial emergence of the pandemic in China – but didn’t fall as far as they did in the other major markets and hadn’t experienced as big a post-March surge. They are now, however, about 10 per cent higher than they were at the start of the year where the US market, for instance, is still about 1.5 per cent below its starting point.
That could be rationalised by the relative strength of China’s economy and buttressed by perceptions that, in terms of the projected earnings of China’s listed companies, its stocks are cheaper than those in the US.
China’s authorities have injected liquidity into their system and expanded an existing fiscal support program since the pandemic emerged, adding to the stimulus they put in place last year during the trade stoush with the US.
The measures appear, however, to be far more modest than the response to the financial crisis in 2008, with the authorities mindful of the legacies of leverage and misallocation of capital that still linger within their economy as a result of that massive program. They are also far more modest than the fiscal and monetary policy responses to the pandemic in other large economies.
The initial state encouragement to retail investors could have been an attempt to generate confidence in the face of escalating external threat as China’s relationship with the US and other western countries deteriorates on a number of fronts.
China’s role in the pandemic is arguably the least of them and the trade tensions with the US, the continuation of the tariffs imposed last year and the potential for another spike in tensions as China lags the commitments it made to purchase US goods in the truce agreement last year are also secondary issues.
The Trump administration’s continuing war on Huawei and other Chinese technology companies, the cancellation of visas for Chinese students and researchers, the sanctions on Chinese officials and companies the US deems responsible for the treatment of the Uighurs and the threat of sanctions in response to China’s introduction of its national security laws in Hong Kong are providing new flashpoints.
The US has withdrawn its special treatment of Hong Kong, meaning it could slap the same tariffs on Hong Kong trade as it has on the mainland.
More particularly, Congress has passed a bill - yet to be signed by Trump - that would impose sanctions on individuals the US believes are violating human rights in Hong Kong and that could impose penalties on foreign banks regarded as supporting China’s measures.
The power of the US and the dollar in international finance means that sanctioning banks would cut off the flow of capital into Hong Kong and, via Hong Kong, into mainland China. Moreover, the administration has reportedly been discussing something even more damaging and provocative.
For nearly 40 years the Hong Kong dollar has been pegged to the US dollar. If the US were to cut off Hong Kong’s access to the dollar it would ignite chaos in markets – Hong Kong is a key global financial centre – and risk diminishing the global role of the dollar and elevating the yuan's in what would be a bifurcated global financial system.
That makes it most unlikely that the US would try to attack the peg, but this administration is unpredictable and it is an election year in the US where the US relationship with China is a meaningful policy issue, with both Trump and Joe Biden trying to seize the more macho ground.
Beyond the unusually anaemic state of the economy there is also the volatility in China’s relationship with the rest of the world, and the US in particular, that doesn’t seem to have been factored into the retail buying of China’s stocks.
Then again, one could argue that the US – where coronavirus infections are soaring and state economies are closing down again – and other western stock markets are equally disconnected from the underlying realities of their economies and the breakdowns of the global relationships and institutions that promote geopolitical stability.