Wave of optimism fails to stir sluggish markets
Updated: 2012-07-24 06:29
By Yu Ran(HK Edition)
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Investors monitor their share prices at a stock brokerage fifirm in Huaibei, Anhui province. Having dropped a 22 percentage points in 2011 and 2.3 percentage points in the fifirst seven months this year, Shanghai Composite Index was among the worst performers in the world. AFP Photo |
Stock market on the mainland dips to a new low even after the long expected monetary easing policies released by the central government. The tale of rebound sounds increasingly unreal. Yu Ran reports.
Every month in the past year or so, demoralized investors in mainland stocks were told by seemingly authoritative market gurus that a turnaround was just around the corner.
The rank of boom-sayers appeared to have swollen rapidly after the central bank lowered lending rates in early June. It was the first time lending rates had fallen in three years. The move was cited by market bulls as a shift in government monetary policy that would do wonders to lift the market from its prolonged doldrums.
But the market refused to budge. The leading indicators tracking share prices on both the Shanghai and Shenzhen stock exchanges have sunk to even lower depths despite a second rate cut in July. The turnaround story, repeated like a broken record by so many experts in the marketplace and academia, sounds more and more like nothing but a fairy tale to the hundreds of thousands of investors yearning for the day they can recoup their losses.
Hard-pressed for any reason to be optimistic, the market bulls have shifted the debate to market valuation, citing historical price to earnings, or PE ratios, to show that the major listed companies on the Chinese bourses are massively undervalued at current prices. But their shrill voices failed to silence those who put forward claims to the contrary, who seemingly are in the minority. The naysayers contend that the torrent of new share issues in the past few years and the dim earnings prospects of many listed companies have combined to render the PE argument not only pointless but also misleading.
The raging debate, joined by many widely recognized market experts on the mainland and abroad, including some of the most prestigious investment banks and stock brokerage firms, is closely watched by domestic as well as foreign investors. At issue, economists and stock analysts agreed, is investor confidence in prospect for the Chinese economy which is facing a severe test. These trials are mounted by the European debt crisis, the faltering economic recovery in the United States and China's own sluggish progress in economic restructuring, to achieve more balanced and sustainable growth.
To appreciate the real meaning of the stock market debate, it will pay to step back and refresh memories of the market's dreary performance over the past 18 months or so.
Dropping a full 22 percentage points in 2011 and 2.3 percentage points in the first seven months this year, the most widely followed Shanghai Composite Index was among the worst performers in the world, despite occasional spurts.
Only 448 of 1,070 companies that had disclosed first-half results said they expected earnings to increase for the entire year, according to data compiled by Financial China Information & Technology Co Ltd.
As many as 130 companies said they lost money in the first six months of the year.
Worst hit were those in the chemicals, automobile and machinery sectors, as demand continued to fall.
In an earnings warning, steel maker Beijing Shougang Co Ltd estimated that it will lose 250 to 350 million yuan for the year, after the industry as a whole reported a loss in the first quarter.
Tianjin Teda Co Ltd, whose business includes real estate, expects a loss of 130 to 150 million yuan.
The earnings of banks and oil companies, which have the biggest market capitalization in the A-share market, are also under pressure. The National Development and Reform Commission has lowered oil prices and the People's Bank of China made deposit and lending rates more flexible, resulting in a narrowing of the price spreads which have remained the major source of profit for mainland banks.
Despite the gloom, some economists have remained sanguine. "Easing inflation will give the central bank more room to relax monetary policy, which will support growth in the second half," said Zhang Qi, an analyst with Haitong Securities Co Ltd.
Zhang added that banking shares are among the most attractive, judged by their valuation.
The prices of banking shares are now at an historic low, as investors worry that steps the central bank has taken to liberalize interest rates will impede lenders' ability to make profits. Optimists have been saying that at current prices, bank shares are a bargain. The market obviously thinks otherwise.
Take the example of Industrial and Commercial Bank of China Ltd, the price-to-book ratio was 1.58 at the end of March, far down from 5.04 for the end of 2007.
Ten out of the 16 listed banks saw their price-to-book ratios drop to less than 1.1 when the market closed on July 17.
The announcement made by the Peoples Bank of China, lowering interest rates by 25 basis points, in order to spur economic growth was seen by market bulls as an infusion of funds capable of reviving the moribund stock market. But the economy obviously is the government's primary concern. What's more, with investors' confidence sinking to such low levels, it's doubtful if any significant amount of new credit is finding its way to the stock market.
In the first half of the year, China witnessed the slowest rate of growth in more than three years, as GDP increased by only 7.6 in the second quarter.
Since the fourth quarter of 2011, the central bank has decreased reserve requirements for banks on three occasions, to inject more liquidity into the market by allowing banks to lend out more loans.
It cut the requirement in November for the first time in three years, cut it again in February and again last month. It is expected to announce a further cut this month. Stock analysts are placing great hope, if not equally big bets, on the bullish impact on the stock market.
As the top Chinese brokerage, CITIC Securities Co Ltd predicted, the slow down in GDP growth in the first half year, will be followed by an increase in GDP above 8 percent in the second half. The firm predicts that growth will reach the overall target of 8.3 percent with more industrial enterprises coming back and showing profits up to 10 percent.
In addition, Guotai Junan Securities Co Ltd also presented an optimistic outlook the next half, predicting the A-share stock index will find a market range between 2,300 and 2,800 points, following the incremental declines in the reserve requirements.
However, certain analysts also pointed out that the stock market seemed hardly stimulated, by the lowered restrictions.
"Over 70 percent of investors in the stock market in Chinese mainland are losing money continuously, while the loosening monetary policy isn't going to have a direct impact, on the stock market," said Ren Shougen, professor of School of Economics of Jiangxi University of Finance and Economics, adding the new policies may have no effect.
During the period that the central government tried to bolster the stock market in early May, the A-share market index dropped sharply again with certain stocks sinking over 20 percent in the past two months.
"The stock market plight is not caused by the lack of investment funds but, rather, it reflects the growing fear of investors that the market will not recover anytime soon," said Ren.
Ren added that it is better to rebuild a healthy investment environment, as the PE ratio is a reflection of investors' confidence rather than an absolute measurement of pricing.
Also, the experts pointed out that the performance of stock markets is tightly related to the overall economic environment on the Chinese mainland with the mainly manufacturing-based SMEs (small and medium-sized enterprises) operating in the red.
"The whole economy in the country is slowing down as expected with most of trading SMEs affected by the recession in Europe and the US for the past half year," said Gui Haoming, the analyst from Shenyin & Wanguo Securities.
Gui added that more attention should be paid to regulate and monitor the healthy operation of the SME Board index to ensure that the main force to boost the Chinese economy is recovering.
To boost both stock markets in Hong Kong and the mainland, the State Council made the announcement at the end of June that the government will push forward joint ventures for stock exchanges in Hong Kong, Shenzhen and Shanghai, as well as issue exchange-traded funds (ETFs) listed on both the Hong Kong and mainland stock markets.
Foreign investors will also be encouraged to use China's currency, the yuan, to conduct trade settlements and investment in Hong Kong.
Other financial policies include improving the variety of offshore yuan-based services in Hong Kong and facilitating long-term investment from Hong Kong in the mainland's capital market.
An ETF is an investment fund traded on stock exchanges, much like stocks.
Through the project, financial institutions in Shenzhen will be encouraged to make yuan-denominated loans to overseas companies, and lenders in Hong Kong will be allowed to extend yuan-denominated loans to companies.
"The introduction of the ETFs is one of the various policies meant to strengthen financial cooperation between Hong Kong and the mainland, benefiting each other by attracting more investors," said Wang Jianhui, chief economist with Southwest Securities Co Ltd, an investment bank.
You may contact the writer through yuran@chinadaily.com.cn
(HK Edition 07/24/2012 page4)