21 August 2019
In a bull market, investors should always be prepared for the return of the bears. Photo: HKEJ
In a bull market, investors should always be prepared for the return of the bears. Photo: HKEJ

Why the bear may return this summer

China’s exports dropped by 14 percent in March from a year earlier, while imports fell 12.3 percent.

That indicates China’s economic growth is decelerating.

Central bank governor Zhou Xiaochuan has hinted at further monetary easing measures in the second quarter amid the faster-than-expected slowdown in economic growth.

China already injected massive capital into the economy last year.

That includes lowering the down payment ratio for second homes to 40 percent from 60 percent of the value.

Property accounts for 74.7 percent of the investments of Chinese households, far exceeding the 27.9 percent of their US counterparts.

The cycle of stimulating growth in gross domestic product through rising property prices wound up last year.

And labor costs have surged 70 percent since 2008, which has taken a heavy toll on the country’s manufacturing sector.

A large number of factories have moved to other Asian countries, like Vietnam, Cambodia and Myanmar, where labor costs are only half of those in China.

And the appreciation of the renminbi since May 2007 has also led to high-tech manufacturing moving back to Japan, Germany and the United States.

The Chinese government tried to step up investment by state-owned enterprises to offset the sluggish manufacturing sector during 2009 and last year.

During the ongoing anticorruption campaign, more than 76,000 officials were sacked last year, which has hurt sales of luxury goods and gaming revenue in Macau.

The crackdown on corruption will benefit the country in the long run, but it may worsen its economic woes in the short term.

Therefore, Beijing has tried to boost the domestic stock market since March last year, in an attempt to cushion the economy against sliding exports and the cooling property market.

However, first-quarter GDP growth has eased to 7 percent, since Chinese households have very limited exposure to the equity market, although A shares have doubled since March last year.

The Hang Seng Index rallied sharply this month after the Shanghai Composite Index surpassed 4,000 points.

That indicates that mainland investors are wary of the underlying risk of mainland market and are trying to find alternative investments.

Whopping gains in the stock market may not be able to stem the downside risk of lower GDP growth for the rest of this year.

The Hang Seng Index hovered between 22,530 and 25,000 points between November last year and March this year, as investors fretted about the likely US interest rate hike this year.

The sudden massive inflow of mainland capital has taken the Hong Kong stock market into the “Goldilocks” stage.

The fairytale says Goldilocks entered the forest home of three bears while they were away.

She was very happy to find everything she wanted in the house and stayed there comfortably.

But the bears killed her when they returned.

Investors should enjoy the limited “Goldilocks” period before the bear returns, which may occur in the second or third quarter, as China’s GDP growth continues to be mired in a downward cycle.

This article appeared in the Hong Kong Economic Journal on April 16.

Translation by Julie Zhu

[Chinese version中文版]

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Chief Adviser at the Hong Kong Economic Journal

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