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The Current Bull Market


注:本文发表于China Daily,转载请务必注明出处。


The current bull market caught investors and regulators off guard. China’s ChiNextPrice Index, SZSE SME Price Index and SZSE Component Index rose sharply in the first half of this year. The popular stock market sectors have now changed from technology and consumption into brokerage, banking and real estate.


In my view, the rapid increase in the A-share market is mainly driven by four factors, and how these factors evolve will decide how long the current bullmarket will last.


First of all, China will hopefully ease its monetary policy continuously to deal with the negative impact of the novel coronavirus outbreak on the Chinese economy and to act in concert with large-scale issuances of government bonds and local government special bonds in the second half of this year.


China’s gross domestic product shrank 6.8 percent year-on-year in the first quarter.Although its GDP growth will hopefully shift from negative to positive territory in the second quarter, it is really hard for the full-year growth to be higher than 3 percent. Currently, insufficient aggregate demand is the principal contradiction facing the Chinese economy.


During the annual meetings of China’s top legislative body and top political advisory body this year, the country has set the basic tones for loose macroeconomic policies.


The People’s Bank of China, the central bank, has cut the reserve requirement ratio for three times since the beginning of this year. It also lowered the one-year medium-term lending facility rate and relending and rediscount rates several times, in addition to establishing new mechanisms for monetary policy instruments to directly stimulate the real economy, the part of the economy that produces goods and services.


At the end of June, China’s M2, a broad measure of money supply that covers cash incirculation and all deposits, rose 11.1 percent year-on-year to 213.49 trillion yuan ($30.5 trillion). The growth rate was 2.6 percentage points higher than that in the same period of last year, according to the PBOC.


Preliminary statistics from the central bank also show that China’s newly added total social financing, a measurement of funds the real economy receives from the financial system, came in at 20.83 trillion yuan in the first half, increasing by 6.22 trillion yuan from the same period of last year.


To prevent large-scale issuance of government bonds and local government special bonds from crowding out private sector financing in the second half of this year, the country’s monetary policy will remain moderately loose. We will hopefully see further cuts in banks’ reserve requirement ratio and interest rates.


The market expectation for continuous implementation of a moderately loose monetary policy will undoubtedly promote the development of the current bull market.


However, China’s GDP will grow by 6 percent year-on-year in the third quarter and 7 percent in the fourth quarter, according to my estimation. With the waning of the pandemic and China’s economic rebound, we are not very likely to seemarginal relaxation of the monetary policy in the second half of this year,unless a massive second wave of COVID-19 will take place.


Secondly,with the deepening of financial regulation and the rise of financial risks in traditional areas, banks and trust companies are forced to reduce their holdings of non-standard assets via a large amount of wealth management funds and trust funds and increase asset allocation to A shares through various channels.


Onthe one hand, financial regulators have kept pressurizing banks and trust companies since 2017, requiring these financial institutions to reduce the proportion of their off-balance sheet assets to total assets and the proportion of their on-balance sheet assets allocated to non-standard assets.


On the other hand, with the slowing down of China’s economic growth and the continuity of macroeconomic regulation, financial risks associated with loans to local government financing vehicles and real estate developers — key areas of assets to which wealth management funds and trust funds are allocated —started to be exposed gradually.


As a result, trust funds and banks’ wealth management funds are more inclined to largely increase their holdings of A shares via channels including mutual funds, private equity funds and exchange-traded funds. The transition of funds allocation of institutional investors is favorable to the formation of the current bull market. 


Whether or not wealth management funds and trust funds could continue to flow massively into the stock market depends on the judgment of regulators on potential risks.If regulators believe that overly rapid stock market surge may trigger relatively high risks, they may tighten regulation of the size and the proportion of wealth management funds and trust funds allocated to the stock market.


Thirdly, as the impact of the novel coronavirus outbreak on global financial markets has temporarily come to an end,

the risk sentiment of global institutional investors started to rise again. We recently saw massive inflows of north bound funds which were invested in blue-chip stocks.


Compared with other major markets, the fundamentals of China’s stock market are more stable, and the valuations of its stock market are more attractive than that of the US stock market. Recently, massive inflows of north bound funds have driven a rapid increase in blue-chip stock prices since the last third of June.


However, the pandemic has rebounded strongly in the US whose President Donald Trump is likely to wield the stick of the US-China economic and trade friction again. The geopolitical friction in the Middle East may also intensify. Considering all these factors, we cannot rule out the possibility that global financial markets may become turbulent in the second half of this year, and China may see capital outflows once again.


Finally, a series of policies that regulators have launched or will launch boosted investor confidence in the stock market. For instance, regulators are considering whether or not to grant securities licenses to some commercial banks, and rumors say that regulators will encourage mergers between large brokerage firms. These policy measures stimulated rises in stock indexes, China concepts stocks, and stocks in the banking and securities sectors.


But the market may have overinterpreted these reform measures, some of which maynot be launched. Therefore, enthusiasm ignited by financial reforms may face the risk of a correction.


Itis not hard to see that the first three factors driving hikes in the A-sharemarket are all related to liquidity, rather than economic fundamentals.


In summary, China’s stock market may find itself in the middle of the current bullmarket which will continue for a while, but market volatility and financial risks will increase.

We may see performance divergence among stocks once again, and the market will pay high attention to marginal changes in various types of liquidity.


Under the circumstances, common investors should pay particular attention to risks that may exist in individual stocks and sectors whose valuations are high inspite of their weak business performance. 

 

The writer is the director of the department of international investment at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.




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