A widespread credit crackdown in China is roiling a range of Chinese asset classes but economists and strategists are welcoming the moves they believe will help prevent a repeat of steep losses recorded almost two years ago.
The Shanghai Composite Index is down almost 5 per cent in the past two weeks, and fell 1.4 per cent on Monday – its biggest fall since December. It traded up 0.3 per cent on Tuesday.
Over the weekend, China’s official Xinhua News Agency reported that while capital markets have suffered some corrections of late, “these have little impact to the stability of the broader environment”.
That report came after the head of China’s Securities Regulatory Commission, urged exchanges to “punish market irregularities without mercy”.
These comments have been read by investors to signal the government is still firmly focused on reducing financial risk, despite recent asset sell-offs.
The Chinese sharemarket “has a lot of hidden leverage”, said independent Shanghai-based economist Andy Xie.
As such, it’s not surprising that investors have reacted in such a way to the government’s crackdown, which in Mr Xie’s view is long-overdue and necessary.
In the second quarter of 2015, a major speculative bubble in Chinese equities burst, forcing the government to intervene to limit sharemarket declines. Preventive measures
The government’s current actions are an attempt to prevent a repeat of this, said Hong Kong-based Mark Tinker, the head of Framlington Equities Asia at AXA Investment Managers.
He played down the odds of a repeat of 2015, saying that the index appeared to be approaching “some decent long-term support”. Falls of the kind seen in recent days, he added, are not unexpected on an equity market like Shanghai’s.
“The Shanghai stock market may be one of the largest in the world by market capitalisation, but it is not a traditional institutional market,” he said. “It has a large weighting to state-owned enterprises and is highly retail in its nature and thus can be very volatile.”
Another quirk of the bourse is it tends to follow its own path, with gains and losses having little relation to movements in global equities – this week it tumbled amid a strong global rally after the French election result.Good opportunities
If Chinese stocks continue to fall they could make for good buying opportunities, said Fidelity International investment director Catherine Yeung.
“Recent news doesn’t change the fundamentals of the companies we like nor the broader economic landscape,” she said.
“We remain constructive on China … The Chinese economy is likely to muddle its way through in the rest of 2017 but we are finding attractive opportunities in Chinese equities. The earnings cycle has turned but valuations are at a historical average. With the reporting season showing some good results, coupled with the stable economic backdrop, we expect Chinese stocks will be supported by strong fundamentals and reasonable valuations.”
OANDA senior trader Stephen Innes said stronger-than-expected first-quarter economic growth had provided Chinese authorities with room to move on economic deleveraging. “Investors have little option but to comply and reduce positions, [but] the underlying fundamentals win out at the end of the day,” he said.
The impact of the Chinese credit crunch on the iron ore downturn has been much debated. “Mainland investors view commodities as a US dollar hedge on the anticipated reflationary trade,” Mr Innes said. Iron ore fell 2.5 per cent to $US66.53 a tonne on Tuesday, after falling 25 per cent in the past month.
While it’s possible a reduction in such speculation – due to the capital crackdown – is behind the asset’s rapid falls, Mr Innes points out that periods of high speculation also tend to be accompanied by high capital outflows. This hasn’t been the case recently, leading him to think iron’s price movements have more to do with the metal’s global supply glut.