Where is the Bottom of the Stock Market?
The time scale for measuring the keeping falling of China’s stock market has turned from week into month, quarter and year, and all players in the stock market care only one topic: where is the bottom?
For the question of “where is the bottom”, the slight clue lies in the stock market, and the important clue lies in the foreign exchange market; as the policy agency of the stock market, China Securities Regulatory Commission is less important than People's Bank of China (PBoC, China’s central bank); thought China’s monetary system is the decisive strength that dominates the stock market, the deeper root is the turn from export-oriented economy to domestic demand-led economy.
As we all know, the variation trend of interest rates are one of the decisive factors that influence the stock market. What is not widely known is that the shadow strength that dominates China’s interest rates is currency surplus which provides a large scale of cheap money to the whole economy through PBoC’s balance sheet. Just because of this cheap money, China featured with “cheap capital” in more than 10 years till 2008, thereby the extra returns had been increased, and investments had been promoted. As a result, it drove the self-enhancing cycle of “export increase--foreign exchange surplus increase--sustained cheap capital--enterprises gained high return--investment expansion-- export increase”. What the self-enhancing amplifier reflects on the stock market was the crazy rising in 2006 and 2007.
However, as for China, the explosion of the financial crisis in 2008 didn’t simply mean a recoverable shock, but a fundamentally on-going weakening of external demands, which opening the prelude of the ending of an export-oriented economy. The ending of such growth model is changing various aspects and even the deep structures of China’s economy and society through its impact to interest rate. And the great adjustment of the stock market was just a wave of the big tide.
As a whole, with the structural shrinkage of the foreign trade surplus, transition is being carried out silently in China’s monetary system. The time of the Chinese style “cheap funds” has gone for ever. Correspondingly, interest rates of deposits and loans are quickly going liberal and becoming higher.
Such changes of interest rates have profound significance.
With the higher deposit interest rate, it begins to break the “financial repression” for a long time, and benefit distribution pattern has finally turned to favor resident sectors; on the opposite, the good days that the financial sectors just sit and count cash have gone for ever. Of course, bank sectors that have lowest financial competitiveness suffer the strongest shock, and their direct reaction is to carry out a large amount of refunding. Then, it is no wonder for the downturn of bank shares in the stock market for a long time.
With higher deposit and loan interest rates, the pattern of capital return has changed. From this perspective, the structural adjustments of real estate market are reasonable. The risks of the real estate market are accumulating, and the releasing ways of the risks still remains to be seen, and it also tests the policy wisdom of relevant departments. When we take this consideration into the stock market, we can found real estate shares deserve more observations.
For the financial sectors, they focus their core production into bonds with upward adjustments of interest rates. Surrounding with bonds, a huge market with amazing scale with rich levels will be developed. Comparing with today’s scale, there will be huge increase for more than two orders of magnitude; with the development and subdivision of multilevel bond market, especially the expansion of junk bond market, the act curtain of industrial merger will be pulled open.
For the industrial sectors, the upward adjustments for deposit and loan interest rates will lead to that the merger with scale shares as targets becomes a loud and clear melody that is hard to be covered up. While for the various financial enterprises in the industrial sectors, especially for many state-owned enterprises that have taken the advantages of interest rate liberalization, they will become divided, and the weights, positions and roles of finance will become more and more important, and such a change comes so quickly, I’m afraid not all big enterprises are fully prepared. For today’s stock market, it has not fully reacted to it. In another word, the division of the strong and the weak is still to be carried out.
Viewing from a larger scope, the export orientation of economy is experiencing the labor pain of creative destruction. The collapsing of the Wenzhou fund chains that gained wide concerns has its certainty, and it may be regarded as the component of the price for transformation. The experiencing of the tragic revaluation for these export and relevant sectors is unavoidable. Viewing from the progress of the transformation, I’m afraid the adjustments are far from being in place. It means that as the main body of the stock market, in a rather long period, these sectors will still drag the value pivot of the stock market toward further moving down.
The good news is that the financial distortions of resident sectors are gradually corrected. Matching up with the main rising wave of urbanization, the urban middle class of the third class and below cities are releasing strong energy, making the increase transfer to domestic demands. Viewing from the angle of the stock market, the sectors of domestic demands, especially the consumption companies, they are doggedly and firmly walking in the rising channel.
When the bottom of the stock market will be seen? From a large scale, it depends on the shift of external and domestic demands, and it depends on when the domestic demands gains a decisive strategic advantageous position. Though the path is zigzag, the future is bright after all.
Originally published on Think-tank Report | 2012-11-15
