The stock market is often regarded as a barometer of the state of a country’s economy. In China, however, this is not necessarily the case.
Last week, the National Bureau of Statistics announced that China’s economy grew 7 percent in the first quarter, the worst quarterly performance since the fourth quarter of 2008.
Fixed-asset investment, a key driver of the economy, grew 13.5 percent, the weakest expansion in the first three months of a year since 2000. Investment in the property industry grew only 8.5 percent, the first single-digit growth in years. Retail sales growth continued to moderate at 10.6 percent.
Clearly, China’s growth has continued to slow since the start of 2013, and there is no sign of a solid rebound.
Despite the sluggish performance of the broad economy, China’s stock market has done exceptionally well. The benchmark Shanghai Composite Index almost doubled in the past 12 months, making the Chinese equity market the best performer among major global peers.
The bullish Chinese market also gave a shot in the arm of Hong Kong’s equity market, which hosts a big number of Chinese companies and now has a Stock Connect program to channel Chinese capital to Hong Kong stocks.
The decoupling of China’s stock market and broad economy is nothing new, as many have pointed out that the Chinese equity market has long ceased to reflect the fundamentals of the economy.
Then the question is, if not the economic performance, what drives the Chinese stock market? The answer is government will.
This round of stock market rally came after the central government decided to alter its monetary stance late last year. As the economic slowdown was deepening, the government cut the interest rates in November last year, showing that China has embarked on a monetary loosening cycle.
As traditional economic engines such as trade, investment and the property market all need some time to recover, top policymakers want an immediate solution to curb the trend of economic slowdown.
In this context, the stock market was chosen as the silver bullet to boost confidence and buy time before other sectors pick up again.
To fuel the stock market, the government adopted a number of measures other than simply loosening credit. These measures included allowing individual investors to have multiple securities accounts, greatly loosening the rules for margin financing and making it easy for listed companies to refinance through the stock market.
The government endorsement for the stock market is reflected in senior officials’ recent remarks. For example, central bank governor Zhou Xiaochuan said in March that he didn’t think that capital flowing to the stock market was a bad thing for real-economy sectors. His remarks served as a clear indication of support for the stock market.
Previously, many officials and economists held the idea that a bullish equity market grabbed limited financial resources from manufacturing and services industries and created bubbles.
Apart from stimulating the economy and activating capital flows, a bullish stock market also serves other economic agenda of policymakers.
These include two important tasks. One is the fundamental revision of the Securities Law. A draft amendment to the law has been submitted to the Standing Committee of the National People’s Congress for review on April 20, and is expected to be passed late this year or early next year.
The other important task for the government is to replace the current examination and approval-based system for initial public offerings with a registration-based system. This will take place after the revised Securities Law takes effect.
These are huge changes that will reshape the stock market, so the government wants to create a good atmosphere to press ahead with these tasks, a common approach policymakers adopt in garnering mass support whenever they want to advance major reforms.
Another evidence of this thinking is the delay in the introduction of property taxation, which will be rolled out only when the property market recovers from its recent lull.
To sum up, the Chinese stock market remains to be a “policy” market steered by government decisions, not necessarily reflecting the economic conditions.
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