China’s stock market has been distorted by Beijing’s recent intervention measures.
As such, A shares are likely to trade sideways in the short term. The Shanghai Composite Index may hover between 3,500 and 5,000 points in the next six months.
The market is heading towards a “healthy” track through government intervention.
Right now, the economy is more difficult to boost than the stock market.
Small and medium-sized companies are the growth engines of China’s economy.
However, many of these companies have put their money in the stock market or invested it in peer-to-peer lending platforms. That’s why many of them suffered huge losses in the recent market meltdown.
The growth momentum generated by big companies is quite limited, while private firms with great potential and innovation have been battered in the market crash.
China’s economy may follow a U-shaped or even an L-shape path in the coming years. Economic growth may hover around 6.5 percent to 7.5 percent in the next three to five years.
The second half could be tougher than the first half of the year when stock market was red-hot. Investors may flee to cash and property, which appear to them as the only reliable asset classes.
Contraction in private capital is set to reduce investment, and as such, China’s economy may follow a W-shaped path.
The stock market has been relying on government policy rather than real economic growth in the past few months. And economic growth may weaken further despite an uptick in the equity market.
The stock market may fall back again after posting a short-lived rebound as real economic growth continues to ease to 6.5 percent for the next two years.
The stock market has bounced back after taking a dive off the peak of 5,000 points, and that formed the first “V” of the “W”. The second “V” may come when economic growth deteriorates.
That depends on how the government could restore market confidence.
Meanwhile, the leveraging ratio of companies and local governments remains high.
Banks will be more cautious in lending to small firms during the de-leveraging process, which would further jeopardize the plight of small private firms.
Many of them may obtain loans from shadow banking and illegal lending channels.
China faces both internal and external uncertainties in next two to three years.
We thought the authorities had good control of the economy and financial markets. However, the market meltdown showed that the government is actually less powerful than what we thought.
The government will face greater challenge in bolstering real economic growth in the coming months.
This article appeared in the Hong Kong Economic Journal on July 28.
Translation by Julie Zhu
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