Let China’s stock market to be the barometer of economy

In the past year, China has experienced a crazy bull market. Meanwhile, the economy did not grow as fast as predicted. In the first half year of 2015, Chinese government has applied positive fiscal policy and loose monetary policy to achieve stable growth of real economy, which cannot support the current stock market for now. Financial market has disconnected from real economy clearly.

In the normal market economy, stock market is the leading indicator of real economy. When economy revives from recession, the enterprises reviving from the recession find new growth engine and start to make profit, which can be reflected on the stock price. Then each kind of economic index starts to grow. Since the subprime crisis in 2008, stock index collapses sharply. It only slowly revives in recent year, which shows the reviving process of American economy. The resurgent stock market rewards investors who are capable of discovering valuable enterprises with wealth effects and appeal to new investors at the same time. With the secondary public offering and IPO financing for research and production expansion made by the listed company, it can further stimulate economy to grow faster to be a positive feedback.

However, the phenomenon is not prominent in Chinese stock market. From early 2006 to the first half year of 2014, Shanghai composite index is highly related with PMI. Since the second half year of 2007, stock index creates new peak continuously and GDP reaches the peak in recent decade; while stock index started to fluctuate with economy due to economic problems and has stayed in a seven-year long slack since the end of 2007. Although there is no obvious reversion in economic fundamentals, stock index started to be active and reached the new peak for seven years, which means the stock market has disconnected from the real economy.

From a wider perspective, gains from China’s stock market are not good for a long time. As Prof. Qian Jun from SAIF pointed, from 2000 to the end of 2012 (use 2000 as the base period), Russia made the best performance in long-term stock index after eliminating inflation and cash bonus. India is the second, while the USA is the fourth. 1 CNY invested in China’s market in 2000 only remained 0.66 CNY by the end of 2012 after eliminating inflation. China’s great economic growth did not bring satisfactory stock gains.

Why did the stock market neither reflect economic period nor pay back investors? On the side of stock exchanges and category of listed companies, stocks in Shanghai Stock Exchange made the worst gains since most of them are state-owned corporations or industries with excess capacity, while good performance of stocks was made in Shenzhen Stock Exchange that composed with small and medium-sized enterprises and growing companies.

On the side of real economy, China’s economy is shifting to the consumption-led growth. With the increasing demand for upgraded consumption from China’s booming middle class, there is great growth potential for enterprises such as AC factory, mobile phone supplier, catering provider etc. However, limited by IPO and approval system of secondary public offering, it is much harder for these enterprises to be listed or to issue secondary public offering. Listed enterprise structures do not reflect the economy, so it is not the turn of investors to choose the underestimated stocks.

With financial liberalization, more funds will pour into stock market, becoming the main impulse for this time’s bull market, which means that China is no long the one lack of capital in 1990’s. On one hand, real economy needs capital, especially the excellent private enterprises and innovative enterprises that used to be the vulnerable groups for financing in the past credit dominated financial structure; on the other hand, gains shall be made by investing the projects in real economy rather than saving it in the bank or buying treasuries to obtain fixed return as usual. Stock market is the most important connection for them. As Zhou Xiaochuan, Governor of People's Bank of China said, “money flowing into stock market is another way to support real economy”.

Nevertheless, Chinese stock market still has many obstacles to conquer to support the real economy. Releasing IPO and secondary public offering regulation and giving the investors an opportunity to vote for the listed company with money is the initial way to make the listed company structure consistent with economic growth. Secondly, stock market shall have a better mechanism to reward the good and punish the bad, arrangements of delisting system and information disclosure, etc.

Published in The Beijing News| 2015-7-10