Growth Worries to Plague Chinese Shares
China's stock market risks continued weakness in the near term, and its performance for the rest of the year looks increasingly uncertain due to mounting concerns about slowing economic growth and persistently high inflation.
The health of the Chinese equities market, which has become increasingly sensitive to the country's economic performance, rather than the whims of speculators, is attracting widespread attention at a time when doubts about the momentum of a global economic recovery, especially in both Europe and China, have resurfaced, prompting investors to scale back their appetite for risk.
A set of weak domestic manufacturing data helped push the benchmark Shanghai Composite Index down 2.9% Monday, its largest fall in four months. It lost another 0.3% Tuesday, its fourth consecutive decline, to close at 2767.06. The index is now down 1.5% for the year, making it one of the worst performers in the region.
In a sign of the market's broad concern, Monday's losses weren't confined to particular sectors. The selloff also triggered falls in copper prices as well as in European and U.S. stock markets.
'The major driver for the bearish market is concern on growth. A hard landing. That's it,' said Lu Ting, China economist at Bank of America Merrill Lynch.
Feeding that fear, the preliminary reading of the HSBC China Manufacturing Purchasing Managers' Index, released Monday, fell to a 10-month low of 51.1 in May, from 51.8 in April, showing slower expansion. A reading of over 50 indicates expansion, while a reading below 50 indicates contraction.
'One data point does not make a trend, but it is pointing in a direction that suggests, if sustained, the Chinese economy may be slowing at a faster pace than expected,' Société Générale China economist Wei Yao wrote in a note Tuesday.
On Tuesday, Goldman Sachs cut its forecast for Chinese economic growth for 2011 to 9.4% from 10.0%. The economy grew 9.7% in the first quarter of 2011, down from 9.8% growth in the fourth quarter of 2010.
Qian Qimin, an analyst at Shenyin Wanguo Securities, said he expects the Shanghai Composite Index to fall to near 2700 within a month, suggesting a loss of about another 2.4%.
Analysts were reluctant to make predictions beyond one month because of what they described as an uncertain economic outlook given the central bank's ongoing efforts to tame inflation and as a string of interest-rate increases and other measures begin to bite. China's consumer price index rose 5.4% in March, the fastest pace in 32 months, before cooling a touch in April to 5.3%. The increase in food prices has been in double digits for six consecutive months.
Other recent data has added to the gloomy picture. Auto sales, widely seen as a strong indicator of consumer activity in China, fell 0.25% in April from a year earlier, the first such decline in two years, according to the China Association of Automobile Manufacturers. The industry group expressed doubts that sales growth for the year would reach an earlier forecast of between 10% and 15%.
Auto sales surged 32% in 2010, helped by government incentives such as a lower purchase tax that were adopted as part of Beijing's fiscal stimulus package in response to the 2008 global financial crisis. Some of those incentives have expired.
While anxiety about China's growth prospects appeared to have taken center stage, concerns remain about stubbornly high consumer prices, presenting a policy dilemma for authorities. China's central bank has been tightening monetary policy in response to the inflationary pressure, raising interest rates four times since October and increasing the proportion of deposits that banks must keep on reserve eight times since November.
'There is now increasing evidence that China's economy is entering a period of stagflation: prices continue to rise but economic growth slows,' said Shen Jun, a strategist at BOC International (China) Ltd.
In addition to economic factors, some analysts attributed the Chinese stock market's recent slump to growing expectations of the imminent launch of the 'international board' that Shanghai is planning for foreign companies to list shares in China.
Shang Fulin, chairman of the China Securities Regulatory Commission, said at a forum Friday that the Shanghai bourse is nearing the rollout of the long-awaited proposal, without giving details.
Some analysts said Mr. Shang's remarks led to some panic-driven selling Monday as investors were concerned that new offerings on the international board would eventually pull cash from other stocks and therefore dilute valuations across the broader market.
However, other analysts dismissed the jitters as irrational and blown out of proportion.
'The news of the international board has to some extent added to concerns about a glut of share offerings, but it's not the major driver for the stock market's plunge,' said BOC's Mr. Shen.
The selling has brought the Shanghai market's valuation to near historical lows, with a price/earnings ratio of around 16, but Mr. Shen notes the market may not have hit bottom yet.
'Investors and analysts are revising down their earnings forecasts for listed companies, which means even after these falls, the market is not cheap,' he said.
By Andrew Galbraith
The health of the Chinese equities market, which has become increasingly sensitive to the country's economic performance, rather than the whims of speculators, is attracting widespread attention at a time when doubts about the momentum of a global economic recovery, especially in both Europe and China, have resurfaced, prompting investors to scale back their appetite for risk.
A set of weak domestic manufacturing data helped push the benchmark Shanghai Composite Index down 2.9% Monday, its largest fall in four months. It lost another 0.3% Tuesday, its fourth consecutive decline, to close at 2767.06. The index is now down 1.5% for the year, making it one of the worst performers in the region.
In a sign of the market's broad concern, Monday's losses weren't confined to particular sectors. The selloff also triggered falls in copper prices as well as in European and U.S. stock markets.
'The major driver for the bearish market is concern on growth. A hard landing. That's it,' said Lu Ting, China economist at Bank of America Merrill Lynch.
Feeding that fear, the preliminary reading of the HSBC China Manufacturing Purchasing Managers' Index, released Monday, fell to a 10-month low of 51.1 in May, from 51.8 in April, showing slower expansion. A reading of over 50 indicates expansion, while a reading below 50 indicates contraction.
'One data point does not make a trend, but it is pointing in a direction that suggests, if sustained, the Chinese economy may be slowing at a faster pace than expected,' Société Générale China economist Wei Yao wrote in a note Tuesday.
On Tuesday, Goldman Sachs cut its forecast for Chinese economic growth for 2011 to 9.4% from 10.0%. The economy grew 9.7% in the first quarter of 2011, down from 9.8% growth in the fourth quarter of 2010.
Qian Qimin, an analyst at Shenyin Wanguo Securities, said he expects the Shanghai Composite Index to fall to near 2700 within a month, suggesting a loss of about another 2.4%.
Analysts were reluctant to make predictions beyond one month because of what they described as an uncertain economic outlook given the central bank's ongoing efforts to tame inflation and as a string of interest-rate increases and other measures begin to bite. China's consumer price index rose 5.4% in March, the fastest pace in 32 months, before cooling a touch in April to 5.3%. The increase in food prices has been in double digits for six consecutive months.
Other recent data has added to the gloomy picture. Auto sales, widely seen as a strong indicator of consumer activity in China, fell 0.25% in April from a year earlier, the first such decline in two years, according to the China Association of Automobile Manufacturers. The industry group expressed doubts that sales growth for the year would reach an earlier forecast of between 10% and 15%.
Auto sales surged 32% in 2010, helped by government incentives such as a lower purchase tax that were adopted as part of Beijing's fiscal stimulus package in response to the 2008 global financial crisis. Some of those incentives have expired.
While anxiety about China's growth prospects appeared to have taken center stage, concerns remain about stubbornly high consumer prices, presenting a policy dilemma for authorities. China's central bank has been tightening monetary policy in response to the inflationary pressure, raising interest rates four times since October and increasing the proportion of deposits that banks must keep on reserve eight times since November.
'There is now increasing evidence that China's economy is entering a period of stagflation: prices continue to rise but economic growth slows,' said Shen Jun, a strategist at BOC International (China) Ltd.
In addition to economic factors, some analysts attributed the Chinese stock market's recent slump to growing expectations of the imminent launch of the 'international board' that Shanghai is planning for foreign companies to list shares in China.
Shang Fulin, chairman of the China Securities Regulatory Commission, said at a forum Friday that the Shanghai bourse is nearing the rollout of the long-awaited proposal, without giving details.
Some analysts said Mr. Shang's remarks led to some panic-driven selling Monday as investors were concerned that new offerings on the international board would eventually pull cash from other stocks and therefore dilute valuations across the broader market.
However, other analysts dismissed the jitters as irrational and blown out of proportion.
'The news of the international board has to some extent added to concerns about a glut of share offerings, but it's not the major driver for the stock market's plunge,' said BOC's Mr. Shen.
The selling has brought the Shanghai market's valuation to near historical lows, with a price/earnings ratio of around 16, but Mr. Shen notes the market may not have hit bottom yet.
'Investors and analysts are revising down their earnings forecasts for listed companies, which means even after these falls, the market is not cheap,' he said.
By Andrew Galbraith
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