20 September 2019
PBoC governor Zhou Xiaochuan is expected to launch more monetary easing measures soon. Photo: CNSA
PBoC governor Zhou Xiaochuan is expected to launch more monetary easing measures soon. Photo: CNSA

Honeymoon period in stock markets will sustain until 4th quarter

The Hong Kong and mainland markets remain safe for investors. However, the rally may wind down in the last quarter of this year or in mid-2016.

It’s quite possible to see the market levelling off in the fourth quarter.

The People’s Bank of China (PBoC) is poised to adopt new measures to pump more money into the market.

However, there is little chance to see massive monetary easing in China. Various major central banks have adopted loose monetary policies, including zero interest rate and bond-purchasing programs. The PBoC also witnessed its balance sheet surging over 60 percent since early 2009.

Credit from non-financial institutions already accounted for some 190 percent of the nation’s GDP, even higher than the 169 percent recorded in the United States at the height of the financial crisis.

The ratio is expected to exceed the level in Japan in the early 1990s when the asset bubble burst, and also surpassed the record high during the 1998 Asia financial crisis.

Both the US and Japan have gone through lengthy periods of deleveraging after the ratio of credit from non-financial institutions versus GDP hit a record high. Japan is still mired in an economic slowdown.

The PBoC will continue to inject liquidity in the third quarter if the economic growth shows little sign of uptick. As a result, the credit bubble could swell substantially, putting downward pressure on equity markets.

Meanwhile, the mainland market’s valuation remains reasonable if we consider the market cap of both the Shanghai and Shenzhen markets versus the GDP. However, the ratio is likely to rise to 75 percent in the fourth quarter of this year and up to 100 percent in the second quarter of next year.

Historical data shows that every time the ratio of Shanghai and Shenzhen market cap versus GDP soars over 75 percent over 13 years, the Shanghai Composite Index would drop in the following year by as much as 16 times.

And when the ratio touches 100 percent, that means the market valuation is extremely expensive and almost close to the level of US markets.

Therefore, it’s still safe to bet on the mainland market until the last quarter of this year or second quarter of 2016 from the valuation perspective.

Nevertheless, both markets may reverse the uptrend as early as the fourth quarter of this year given the mainland credit bubble and rising valuation.

This article appeared in the Hong Kong Economic Journal on May 7.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist