The Shanghai Composite Index has decreased badly since the beginning of the year: it only performed better than Athens and Nicosia Stock Exchanges, even if the reasons are extremely different. Ironically, Greek markets follow the crisis of the economy, while the Chinese ones probably suffer of a too strong growth. The GDP grew 11.9%, overcoming the crisis but making true the risk of an overheating.
The Shanghai Stock Exchange has lost the 20% since the beginning of this year and it’s under the bear’s mark. Just during one day the value of the shares decreased of the 5%, affecting real estate, financial services, steel and automotive. Only shares linked to gold registered a growth. The decrease is due to international cycle and internal politic.
The consequences from other stock exchanges related to the crisis are unavoidable; moreover, there are worries about recovering possibilities for Europe, after the Greek crisis. China needs western recovery to continue its growth and each uncertainty affects expectations and after-shares performance. The situation inside China, it is very complex too.
The decrease of the stock exchange is linked to the expectation of more restrictive policy by the authorities. Internal enemies of China are real estate speculation, liquidity excess and inflation, for sure linked one with the others. Cash flows are necessary for restart but could converge on dangerous thoroughfares. In order to stop the easy access to the credit, the obligatory percentage of reserves for banks has been raised to 17% (third time it grows during the year). Moreover, loans for construction activity are more difficult to get, taxes on second houses grew and it was stated that it’s not possible to buy a third house in big cities. These actions are alternatives to the classic increase of the interest rate: Beijing wants to maintain it low, in order not to attract foreign capitals that would nullify its efforts for austerity. Forecasts of a possible growth, however, triggered the beginning of sales. During this uncertainty, pressures on real estate are the most relevant and stock exchange is hit. However, it would be very ill-considered to forecast a long-time crisis for the Shanghai Stock Exchange. Apart from the fact that it is not possible to compare China and Greece, during the last period the ongoing of the economy of a country has been linked with performances of shares, and in this matter Shanghai has become a “Buy” with a P/E ratio of under 25 and GDP growing of the 10%. When the real estate market started to grow very fast in 2008, the stock exchange firstly ran at the same velocity than started to slow down. It’s important to note that the decrease follows a growth of the 80% in 2009.
The point is that, due to the fact that bank interest rates are negative for Chinese money savers, the imperative is to find alternative investments, and one time you bet on the urbanization (with 20 millions of people that has to find a home in the city, leaving the country sides); another time you bet on the economy of industry and of services that has to satisfy an internal demand increasingly sophisticated: health, environment, education, alternative energies, logistic, tourism. Finally what comes out is that, from wherever side you look at it, the Chinese economy shows opportunities. Since its foundation in 1990, Shanghai Stock Exchange has become the second in the world for capitalization after Wall Street. Moreover it has developed other services, like infra-bank loans, bond trading and value exchange. Its role will be however secondary in the world economy, until its International Board will be launched. So it’s possible that the ongoing of the Stock Exchange reflects the modifications of the structure. In this case, this would be “an illness linked to growth, to the young age”. The most fearsome aspect is not its fluctuation, but the fact that Beijing is not able to control totally one of its key institutions.