Policy decisions and a lending spree lifted Chinese stocks to unwarranted heights before the ‘capital feast’ suddenly ended.
By Wang Xiao Lu, Song Yan Hua 04 September 2009
(Caijing Magazine) Followers of U.S. billionaire investor Warren Buffet often quoted one of his famous sayings in the first half of 2009 as a reminder of investment dangers that lurk during periods of extreme liquidity.
“In a bull market,” Buffet once said, “one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world.”
Having heeded this warning, clever investors should not have been surprised when Chinese stock indexes, after being buoyed by a bank lending spree in the first half, began fluctuating wildly in August. It was time for the A-share market to enter a phase of correction marked by weak growth and slow investment.
The Shanghai Composite Index dipped more than 3 percent several times in August. The index fell from an August 4 high of 3478.01 to close at 2785.58 on August 19 -- a 19.91 percent decrease. The A-share market experienced its biggest daily decline so far this year, falling 5.79 percent on August 17. And on August 28, the index closed at 2860.69, down 2.91 percent.
Many industry insiders blamed the slump on changes in monetary policy. They pointed to an August 5 decision by the People’s Bank of China to continue its moderately relaxed monetary policies. The central bank also said it would make further changes through marketization, and based on domestic and international economic trends as well as price changes.
Afterward, the central bank said new loans made by the nation’s banks shrank in July to 355.9 billion yuan from June’s 1.53 trillion yuan. Lending in August was expected to continue this trend; Caijing learned that the month’s loans made by major four banks would total around 165.8 billion yuan.
Even though the central bank repeated previous assurances that the latest moves did not suggest new direction for monetary policy, some investors intuitively sensed that the loose policies seen in the first half of this year would not be returning.
At the same time, banking regulator investigations into loan practices deterred the flow of funds into the stock market through various channels. Some of these practices were apparently illegal.
“There’s no more money in the market!” cried a long-time A-share investor after the substantial decrease in July lending was confirmed.
Liquidity had helped maintain a market boom for months. Some called it a “capital feast.”
Many investors had hoped for sustained growth in A-share values through the rest of this year. At the same time, the market’s sensitivity to monetary policy changes grew more acute.
Now, it’s clear that government policy will be playing a crucial role in the investment climate for the rest of the year.
Backed by policy moves, Chinese banks issued an unprecedented 7.72 trillion yuan in loans from January 1 to June 30. During the same six months, the Shanghai index gained 1,000 points, increasing more than 60 percent. The index broke the 3000 mark on July 1, surpassing investor expectations.
In July, even though many considered the A-share index highly inflated, forecasters continued to predict a rising market every day. But banks were hinting to investors that the lending spree would slow.
“We are waiting for an adjustment period,” a source from a Shanghai private equity firm told Caijing in early July. “After 3000, every additional step brings a feeling of anxiety,”
A group of PE firms sensed subtle changes affecting the market in early July. Regulatory agencies announced that China Securities Depository and Clearing Corp. Ltd. would suspend the opening of new securities accounts for trust companies and said the suspension would be lifted in the future, giving no timetable. That became an unquestionable roadblock for investors trying to enter the market through PE funds.
Between July 27 and 30, the China Banking Regulatory Commission (CBRC) twice requested comments on proposed policies. At the same time, CBRC clearly indicated support for implementing stricter controls on lending. Regulators said they wanted to make sure loans were directed into the real economy, as well as minimize embezzlement risks.
On July 29, A-share prices fell sharply, and later officials said new loans for July would fall to less than one-fourth the amount issued in June.
The market was tense when the central bank announced August 5 that changes would be based on marketization. It was a signal the market was waiting for, and investors responded immediately by dumping their A-share investments.
Net outflow from the stock market by major government institutions declined in mid-August, further dampening market sentiment. By August 17, the market had entered a new phase with the steepest year-to-date decline for A-shares.
The buoyant market during the first half of the year yielded generally high returns for public and private equity funds. According to Shanghai Wind Information Co. Ltd., 99 mutual funds chalked up total earnings of 96.3 billion yuan, although most of those profits were paper gains.
Some investors started pulling out of the market in July. Shenzhen Stock Exchange data released August 14 showed public funds and the central government’s social security fund withdrew 14.8 billion yuan and 664 million yuan, respectively, in July.
A fund analyst who asked to remain anonymous said around 48 billion yuan was withdrawn from the Shanghai and Shenzhen markets in July. Share dumping continued in August. According to preliminary estimates, around 100 billion yuan was withdrawn from July through August.
Public funds, which hold stock worth 2 trillion yuan, have maintained a relatively high level of market investment. And although the social security fund has sold some stock, the scale of its pullout has been limited.
Meanwhile, insurance funds have withdrawn a relatively large amount of capital. But no one expects these institutional giants to abandon the market entirely.
Only funds fuelled by what regulators said was illegal lending were expected to dump stock regardless of cost as being trapped in the stock market would increase the risk of getting caught. Thus, a former public funds manager now working for a private equity fund, predicted that “funds financed by illegal lending will likely be a driving force for short selling.”
Listed companies started releasing their semi-annual financial reports at the end of August. The unnamed funds analyst said most of the latest financial results posted by listed companies fell within the range of market forecasts.
According to Wind, some 1,105 firms reported a total of 287.5 billion yuan in net profits for the first half 2009 as of August 24 – down 2.27 percent year-on-year, with a weighted average earnings of 0.188 yuan per share.
Excluding profits posted by eight, newly listed companies, this group of companies earned 162 billion yuan in the first half – up 31.6 percent compared to the last half of 2008.
Obviously, share prices had climbed to excessive heights in the first quarter without the kind of business performance to support the stock growth, and the recent tumble can’t be explained by fundamentals either. The fund analyst said if a company’s performance “isn’t positive” in the second quarter “it automatically means bad news for the stock.”
Now, stock prices are expected to return to more appropriate levels. Nevertheless, opinions vary about the future of A-shares. One reason is that theories on future interaction between the Chinese and U.S. economies and financial markets range from “decoupling” to “coupling.”
U.S. President Barack Obama announced August 25 that Ben Bernanke would serve a second term as chairman of the Federal Reserve. Many analysts said the choice would help global market stability.
Now, if the Fed chooses to maintain its current “quantitative easing” monetary policies by pumping money into the market, some of those funds would go into emerging markets such as China, raising the prices of emerging market assets.
But some react to this theory with scepticism. Gui Haoming, chief market analyst for Shenying & Wanguo Securities Co. Ltd., said time is needed to heal an investment climate after a steep market decline. It’s now unlikely that the A-share market will sink to new lows, but the possibility of a steep climb is also unlikely.
A manager at a fund management firm, who asked to remain anonymous, told Caijing the A-share market went through a relatively major correction in August that still awaits similar adjustment to occur with U.S. stocks.
The market’s ability to weather the storm underscores the effectiveness of Chinese government policies and China’s relatively early economic recovery, the manager said.
Changes in monetary policy, whether sooner or later, can cause panic and force stock market adjustments. That’s what happened to A shares and, the manager said, it will happen to U.S. stocks as well.
But now that adjustments have been made, A-share investors have a better understanding of policy changes and reached a consensus on the future direction.
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Monetary Policy Steers an A-Share Ride
Policy decisions and a lending spree lifted Chinese stocks to unwarranted heights before the ‘capital feast’ suddenly ended.
By Wang Xiao Lu, Song Yan Hua
04 September 2009
(Caijing Magazine) Followers of U.S. billionaire investor Warren Buffet often quoted one of his famous sayings in the first half of 2009 as a reminder of investment dangers that lurk during periods of extreme liquidity.
“In a bull market,” Buffet once said, “one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world.”
Having heeded this warning, clever investors should not have been surprised when Chinese stock indexes, after being buoyed by a bank lending spree in the first half, began fluctuating wildly in August. It was time for the A-share market to enter a phase of correction marked by weak growth and slow investment.
The Shanghai Composite Index dipped more than 3 percent several times in August. The index fell from an August 4 high of 3478.01 to close at 2785.58 on August 19 -- a 19.91 percent decrease. The A-share market experienced its biggest daily decline so far this year, falling 5.79 percent on August 17. And on August 28, the index closed at 2860.69, down 2.91 percent.
Many industry insiders blamed the slump on changes in monetary policy. They pointed to an August 5 decision by the People’s Bank of China to continue its moderately relaxed monetary policies. The central bank also said it would make further changes through marketization, and based on domestic and international economic trends as well as price changes.
Afterward, the central bank said new loans made by the nation’s banks shrank in July to 355.9 billion yuan from June’s 1.53 trillion yuan. Lending in August was expected to continue this trend; Caijing learned that the month’s loans made by major four banks would total around 165.8 billion yuan.
Even though the central bank repeated previous assurances that the latest moves did not suggest new direction for monetary policy, some investors intuitively sensed that the loose policies seen in the first half of this year would not be returning.
At the same time, banking regulator investigations into loan practices deterred the flow of funds into the stock market through various channels. Some of these practices were apparently illegal.
Sudden Change
“There’s no more money in the market!” cried a long-time A-share investor after the substantial decrease in July lending was confirmed.
Liquidity had helped maintain a market boom for months. Some called it a “capital feast.”
Many investors had hoped for sustained growth in A-share values through the rest of this year. At the same time, the market’s sensitivity to monetary policy changes grew more acute.
Now, it’s clear that government policy will be playing a crucial role in the investment climate for the rest of the year.
Backed by policy moves, Chinese banks issued an unprecedented 7.72 trillion yuan in loans from January 1 to June 30. During the same six months, the Shanghai index gained 1,000 points, increasing more than 60 percent. The index broke the 3000 mark on July 1, surpassing investor expectations.
In July, even though many considered the A-share index highly inflated, forecasters continued to predict a rising market every day. But banks were hinting to investors that the lending spree would slow.
“We are waiting for an adjustment period,” a source from a Shanghai private equity firm told Caijing in early July. “After 3000, every additional step brings a feeling of anxiety,”
A group of PE firms sensed subtle changes affecting the market in early July. Regulatory agencies announced that China Securities Depository and Clearing Corp. Ltd. would suspend the opening of new securities accounts for trust companies and said the suspension would be lifted in the future, giving no timetable. That became an unquestionable roadblock for investors trying to enter the market through PE funds.
Between July 27 and 30, the China Banking Regulatory Commission (CBRC) twice requested comments on proposed policies. At the same time, CBRC clearly indicated support for implementing stricter controls on lending. Regulators said they wanted to make sure loans were directed into the real economy, as well as minimize embezzlement risks.
On July 29, A-share prices fell sharply, and later officials said new loans for July would fall to less than one-fourth the amount issued in June.
The market was tense when the central bank announced August 5 that changes would be based on marketization. It was a signal the market was waiting for, and investors responded immediately by dumping their A-share investments.
Net outflow from the stock market by major government institutions declined in mid-August, further dampening market sentiment. By August 17, the market had entered a new phase with the steepest year-to-date decline for A-shares.
Pulling Out
The buoyant market during the first half of the year yielded generally high returns for public and private equity funds. According to Shanghai Wind Information Co. Ltd., 99 mutual funds chalked up total earnings of 96.3 billion yuan, although most of those profits were paper gains.
Some investors started pulling out of the market in July. Shenzhen Stock Exchange data released August 14 showed public funds and the central government’s social security fund withdrew 14.8 billion yuan and 664 million yuan, respectively, in July.
A fund analyst who asked to remain anonymous said around 48 billion yuan was withdrawn from the Shanghai and Shenzhen markets in July. Share dumping continued in August. According to preliminary estimates, around 100 billion yuan was withdrawn from July through August.
Public funds, which hold stock worth 2 trillion yuan, have maintained a relatively high level of market investment. And although the social security fund has sold some stock, the scale of its pullout has been limited.
Meanwhile, insurance funds have withdrawn a relatively large amount of capital. But no one expects these institutional giants to abandon the market entirely.
Only funds fuelled by what regulators said was illegal lending were expected to dump stock regardless of cost as being trapped in the stock market would increase the risk of getting caught. Thus, a former public funds manager now working for a private equity fund, predicted that “funds financed by illegal lending will likely be a driving force for short selling.”
New Landscape
Listed companies started releasing their semi-annual financial reports at the end of August. The unnamed funds analyst said most of the latest financial results posted by listed companies fell within the range of market forecasts.
According to Wind, some 1,105 firms reported a total of 287.5 billion yuan in net profits for the first half 2009 as of August 24 – down 2.27 percent year-on-year, with a weighted average earnings of 0.188 yuan per share.
Excluding profits posted by eight, newly listed companies, this group of companies earned 162 billion yuan in the first half – up 31.6 percent compared to the last half of 2008.
Obviously, share prices had climbed to excessive heights in the first quarter without the kind of business performance to support the stock growth, and the recent tumble can’t be explained by fundamentals either. The fund analyst said if a company’s performance “isn’t positive” in the second quarter “it automatically means bad news for the stock.”
Now, stock prices are expected to return to more appropriate levels. Nevertheless, opinions vary about the future of A-shares. One reason is that theories on future interaction between the Chinese and U.S. economies and financial markets range from “decoupling” to “coupling.”
U.S. President Barack Obama announced August 25 that Ben Bernanke would serve a second term as chairman of the Federal Reserve. Many analysts said the choice would help global market stability.
Now, if the Fed chooses to maintain its current “quantitative easing” monetary policies by pumping money into the market, some of those funds would go into emerging markets such as China, raising the prices of emerging market assets.
But some react to this theory with scepticism. Gui Haoming, chief market analyst for Shenying & Wanguo Securities Co. Ltd., said time is needed to heal an investment climate after a steep market decline. It’s now unlikely that the A-share market will sink to new lows, but the possibility of a steep climb is also unlikely.
A manager at a fund management firm, who asked to remain anonymous, told Caijing the A-share market went through a relatively major correction in August that still awaits similar adjustment to occur with U.S. stocks.
The market’s ability to weather the storm underscores the effectiveness of Chinese government policies and China’s relatively early economic recovery, the manager said.
Changes in monetary policy, whether sooner or later, can cause panic and force stock market adjustments. That’s what happened to A shares and, the manager said, it will happen to U.S. stocks as well.
But now that adjustments have been made, A-share investors have a better understanding of policy changes and reached a consensus on the future direction.
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