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China: Bear market to continue

Friday, 12 Sep 2008

Summary

More recent press reports suggest that the dog of Asian markets, China, may start improving. We differ. Here is why.

Topics Covered

  1. Mirage: economic rebound
  2. Mirage: property rebound
  3. Mirage: stock market rebound
  4. How to save money off this idea

Background

1. Mirage: economic rebound

Recent data suggest that China's inflation is slowing down, do now authorities merrily can ease. So growth can only rise, right?

Wrong.

Growth cannot resume soon for three reasons:

  • Post Olympics hangover. Any host country experiences this growth hangover once the athletes have cleared their locker rooms. China is no exception.
  • Post policy hangover. Don't forget that Beijing wanted this slowdown. She tightened monetary policy, told commercial banks to lend less and cut non-Olympic public spending. Well, now she is reaping the fruits of such actions.
  • Global growth funk. You know about this, so how can China's exports thrive is the world's excess supply of goods is intensifying?

So how can corporate profits recover in China? So why buy the stock market?

 

2. Mirage: property rebound

We all know how crucial the property market is to conditioning investors' risk appetite. The story is not pretty in China: disillusioned with their legal system, normal people are taking to the streets by protesting about the property market slump. Indeed, the shares of Chinese developers have plunged about 70% since last October, just to give you an idea. Here is what is happening:

  • the square footage of property being sold rose by 26% last year; however, during 1H08, it has fallen by 11%, according to the Financial Times (FT) of 11th September 200, and
  • the growth rate in floor construction dropped by three percent in July alone.

No wonder that people are seeing the values of their properties dwindle.

But why are property values dwindling? Blame the regulator, yet again. Yet again, he is reaping the fruits of earlier policy moves designed to cool the property market, particularly:

  • aiming to limit property market speculation, and
  • squeezing small, poorly capitalized developers.
We are not disagreeing with these moves, but are pointing out that that Beijing made its bed - and now must lie in it.

3. Mirage: market rebound

How can the stock market rebound if the economy, and particularly the property market, remain in a mainly policy-induced funk? Indeed, the market has plunged by 65% since last October's global peak - underperforming even pathetic Japan!

Now there are calls for that magnet of Diktatkapitalismus, the China Security and Regulatory Commission  (theCSRC), wants to introduce relief measures. Never mind that over the past 12 months it has done precisely the opposite of what we list below, again leading us to assert that the CSRC is merely having to lie in the bed which it has made for itself. Now, all of a sudden, in a complete policy volte face, the CSRC wants to 

  • establish a stabilisation fund that will buy shares in order to support the market
  • order the media to stop issuing negative reports on the markets, and
  • control the pace of issuing IPOs. The CSCR will increase the time between when an IPO is approved and when it actually comes to market, i.e. when it is listed. 

All of these measures are drops on a hot stone - until China's Economic Time improves. Shall we say: 2Q09?

4. How to SaveMoney Off This Idea


  1. Always consult your financial adviser first.
  2. Don't buy China, suckers' rallies included.

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