China's stock markets... A dead cat bounce, or are the extraordinary measures beginning to work ?

Thursday 9th July 2015

Naturally enough, the two big issues of Greece and China continue to dominate the output of all news outlets. We'll take the opportunity of giving the former a miss today and wait for reaction to Greece's proposals (and we understand that they'll have some this time) which will be presented to creditors by close of business tonight. China, on the other hand.....

China's stock markets... A dead cat bounce, or are the extraordinary measures beginning to work ?

"China Stocks Cap Biggest Gain Since 2009 as Volatility Surges", Bloomberg.com

For the last two weeks, the Chinese authorities have introduced a raft of quite extraordinary measures in an attempt to halt the stock market rout and restore some confidence to investors. Since the majority of shareholders in China are mostly inexperienced retail investors rather than institutions, a boost to confidence is sorely needed. At its lowest point early this morning, some $3.9 trillion had been wiped off the value of Chinese stocks since the mid-June highs. For an idea of scale, that's more than the entire valuation of the UK stock market.

We've listed most of the steps taken by the authorities in a blog earlier this week, but the latest unprecedented measures were to ban major shareholders (over 5%) from selling stock, to allow banks to roll over loans backed by shares, and to strengthen a supportive share-buying programme by (effectively) the central bank.

Critics argue that such steps could and should never be taken in the more mature market places in the world. That's true, but this is not New York, London or Tokyo, it's China. They also say the whiff of desperation given off by such drastic action generates the very sense of panic that the authorities are trying to dispel. That's less certain, at least at this stage, and today the Shanghai Composite Index for example rallied to close 5.8% up on the day. How's that for volatile?

It's much too early to say whether the measures are beginning to take effect, and certainly too early to conclude that we may have seen the worst of the rout. Mainline Chinese stock valuations have fallen to an average price-to-earnings ratio of about 53, down from over 100. That's still over double the average in the S&P 500 for example, but at least has a more realistic ring to it. We'll find out  pretty soon, but whatever the case China has some fundamental issues to deal with above and beyond stock market gyrations, even allowing for how crucial valuations may be.

Officials are still projecting growth for this year at 6.8 - 7.0%, but an increasing number are becoming sceptical over the prospect of that kind of growth being achieved. Some say that the numbers would have to be massaged to reach that target, and anyway the data will artificially boosted by the huge drop in commodity prices (Oil, Iron, Copper etc). It's a great irony that fall in the price of base metals in particular has largely been caused by falling Chinese demand, and it doesn't really inspire confidence that the more robust estimates for China's growth will be fulfilled.