Chinese stocks last year fell to levels unseen since the global financial crisis, as investors ignored a rebound in the world’s second- largest economy and focused on fundamental problems with the market.
China’s economic growth hit a more than three-year low of 7.4 percent in the third quarter, although recent manufacturing and other data have fueled optimism that it has begun to recover. However, for the country’s 168 million investors –– an unusually high 99 percent of them individuals –– an improving macro-economic picture cannot make up for weak company earnings, poor governance, oversupply of shares and a lack of liquidity, analysts said.
On Dec. 4, the benchmark Shanghai Composite Index plumbed to a four-year low of 1,949.46 points, its worst level since Jan. 16, 2009. It has since recovered more than 14 percent and is up 1.54 percent from the start of last year.
In contrast Hong Kong’s Hang Seng Index had powered ahead almost 23 percent during last year. Tokyo’s Nikkei 225 also rose nearly 23 percent and the S&P 500 is up more than 11 percent.
The disconnect is stark –– China is still by far the fastest-growing major world economy –– but there are fundamental reasons for the Shanghai market’s poor showing.
“Just know this –– the performance of the domestic equity market is not so tightly correlated with the overall economy,” a Hong Kong-based economist for UBS, Wang Tao (王濤) said.
“Structural and governance issues remain and continue to plague China’s equity market,” she said in a report which described the country’s stock market as one of the worst performing in the world.
Many listed Chinese companies are still majority state-owned, so are largely indifferent to the demands of holders of their publicly listed shares.
China also has a massive share glut, with the total value of flotations over the last two years estimated at US$1.3 trillion with hundreds more companies waiting to list as the government –– not the market –– decides which firms are allowed to do so.
At the same time, while Chinese investors have few alternatives to the stock market, many have opted for wealth management products offered by banks, or property purchases.
“The fundamental issue of supply and demand imbalance needs to be solved, or even an economic recovery may not be able to reverse the downtrend,” BOC International analyst Shen Jun (沈鈞) said.
Shanghai-based Woo, a small luxury scarf retailer, would like to seek funding from the market but expects it will take three years to make it through the listing pipeline, starving the firm of the capital it needs for expansion.
“So far, there are 800 companies queuing,” its chief executive officer, Stephen Sun, (孫青鋒) said.
Hopes that an annual government economic meeting would unveil steps to boost growth drove the Shanghai index rebound last month, including a rise of more than 4 percent the day before the gathering began. However, the event yielded no new policies to reform capital markets, and analysts remain pessimistic.
“Before, everyone had fallen into the ice cellar, now everyone has reached bright sunny skies. The change shouldn’t be so fast; the recovery should be gradual,” Shenyin Wanguo Securities analyst Qian Qimin (錢啟敏) said.
He forecasts that the Shanghai market could once again fall through the key support level of 2,000 points.
Officials say the authorities are considering allowing local pension funds –– now limited to putting their money into bank deposits and government bonds –– to buy shares, and have already allowed foreign institutional investors greater access to the stock market, but foreign investors –– who are often more positive about Chinese shares –– still have to abide by a quota system.
“The market had been expecting new policies last year, but in fact there were not any good policies,” Shen said.
Vague government affirmations of support for financial reform were meaningless without concrete action, he said.
“Some policies were just like ‘old wine in new bottles’ –– nothing new there,” he said.