Posts Tagged ‘Economy’

Malcolm Turnbull’s full press conference on challenging Tony Abbott for leadership of the Liberal Party of Australia.

Don’t bet more than you can afford. Don’t borrow to play. Don’t chase your losses. Quit while you’re ahead.

 

If only Chinese stock market investors had followed these basic gambling rules. Seduced by dreams of getting rich quick, millions of inexperienced Chinese investors have lately been treating China’s stock market like a casino. With the help of social media, the optimistic sentiment spread quickly, pulling more in. The index for the main board of the Shanghai Stock Exchange almost doubled in the past year. The index of small cap stocks has tripled or better. It became a classic asset bubble. Then it all came crashing down.

 

The role of the Chinese government

 

The government-engineered bull market was meant to help resolve China’s real estate bubble and over-leveraged local governments, incentivise innovation and facilitate reform of state-owned enterprises. Instead, it was hijacked by highly-leveraged greedy individual investors. As the government became concerned and began to deleverage margin trading, it set off a stampede, with everyone rushing to the blocked exit doors because of the 10% price limit trading rule. Over the past three weeks the market dropped by 30%. Even after this correction, many small cap stocks remained over-valued.

 

In an effort to calm the market, the government has taken measures to buoy the prices of blue chip stocks, temporarily halted IPOs and lifted insider trading rules to make it easier for company directors to buy back their own shares. It has also imposed a one year stock sale ban on anyone owning 5% or more of shares in a company. When the government began focusing support on blue chips, at least 1,439 Chinese listed companies — 50% of overall listings — applied for a temporary trading halt in order to protect themselves. This also contributed to the panic.

 

Even Chinese companies listed in other markets were affected by the crisis. The hashtag #ChinaMeltdown began to spread on international social media. US investors began selling off stocks in Chinese companies listed there even though they are not affected by the liquidity crisis in the Chinese stock market.

 

Just before the Chinese market plunged, there had been a surge in US-listed Chinese companies planning to go private hoping to chase the higher valuations in the Chinese market with an eventual Chinese IPO. Many will have to delay these plans.

 

China’s economy at ‘new normal’

 

The Chinese market crisis is a reflection of the over-valuation and over-leveraging of small-cap stocks, and is not comparable to what happened in the US in 1929, which reflected a fundamental crisis in the US economy. The Chinese economy has already moved to a “new normal” stage in anticipation of a slower rate of growth as it transitions from manufacturing to consumption. China’s GDP growth rate is still 7%.

 

Investors in emerging markets tend to overestimate growth which leads to overvaluation. In China 85% of investors are individuals, unlike in developed markets where they are institutions. The turnover rate of these Chinese investors is more than 900%, the highest in the world. The account balance of 84.1% of these investors is less than 100,000 RMB, and 10.39% have a balance between 100,000 and 500,000 RMB. Only 6% have a college degree.

 

Chinese investors also understand that the priority of the government is social stability; the government will step in when anything threatens that objective. This recent bull market can also be seen as a typical example of investors hijacking this sentiment.

 

The government knows it must rebuild investor confidence or the pessimistic sentiment could spill over into the banking sector. Some insiders believe that a significant portion of the capital that was used for margin trading actually came from the asset management products that were issued by the banks. If the banking sector is impacted, then the negative sentiment could spill over to consumers’ willingness to spend, which would then impact the overall economy. There have also been reports that some entrepreneurs have speculated in the stock market using their company’s operating capital.

 

A lesson in market risk

 

Any stock market is built on confidence and the expected value of future cash flow. The objective of the government should be to mitigate the systemic risk rather than managing the stock index. The government is over-protecting retail investors. The function of the capital market is to charge different prices or risk premium on firms relative to their risk levels. Everyone should understand the rule of the market: higher returns mean higher risk.

 

At the end of last week, as the market realised how determined the government was to handle the problem, some experienced investors began returning in a hunt for bargain stocks. I expect the market will gradually bounce back, though with some short-term volatility because small-cap stocks are still mostly overvalued and some investors are still highly leveraged.

 

The bull market spirit is still here, but hopefully both the government and retail investors will learn a valuable lesson from this crisis. The market is designed for long-term financing, not short-term speculation. Investors should respect the power of the market.

Emerging from last year’s recession, many in the financial industry were curious about the Japanese government’s take on its own recovery programs. While these programs included a substantial stimulus package, they also included increases in sales tax and capital expenditures. However, based on a recent statement issued by the Bank of Japan, the nation apparently feels quite positive about its recovery progress; a fact signaled by its announcement of plans to maintain the Bank of Japan’s massive stimulus program.

In the announcement (made Friday), the Bank of Japan not only described plans to continue the stimulus program, but asserted that growth would accelerate inflation to the BOJ’s 2 percent target without any additional monetary easing. This assessment was based on observations of improving business sentiment and an increase in capital expenditures. The Bank of Japan also announced its decision (made by an 8-1 margin) to keep intact a pledge to increase base money at an annual rate of $650 billion per year via aggressive asset purchasing. The Bank of Japan noted in a statement reported by Reuters“Exports are picking up and capital expenditure is rising moderately as a trend as corporate revenues improve.”

The BOJ also revised its assessment on housing investment, indicating that the industry “appeared to be picking up.” Just last month the BOJ had said it believed that housing investment was bottoming out. This revision is not a retraction of the prior month’s assessment, but rather an indication of positive upward movement in this segment of the economy.

Japan experienced a stronger than expected performance in the first quarter of 2015. Prior to this surprise showing, most economists pegged the economy’s projected growth at somewhere under one percent for the year. However, after the reported first quarter showing, some have increased their expected growth rate to somewhere between three and four percent.

Some analysts believe the BOJ may become more hesitant to ease for fear of weakening the yen. The value of the yen sank significantly during the recession, which has actually served to help the still sagging export market, but has drawn criticism from the public and lawmakers. A strong yen has often been a source of national pride, and the Governor of the Bank of Japan is expected to address the nation after the next BOJ meeting to discuss the pros and cons of a weak yen.