What goes up ...
The Chinese stock market is in a buying frenzy. It has been renewing seven-year highs with the main Shanghai index passing the 4400 level. Since the Shanghai-Hong Kong Stock Connect, a cross-boundary channel that connects bourses in Shanghai and Hong Kong, opened last Nov. 17, shares are up 78 percent. Turnover has been astronomical. Daily market turnover topped the 1 trillion yuan ($161 billion) level, leading to a breakdown in the Shanghai stock exchange computer system that displays trading data. Daily trade volume of over 1 trillion yuan has become common.
What is fueling the bull run in Chinese stocks? Credit should go to individual investors and smartphones. The number of stock market accounts that were newly opened over a recent two weeks in China exceeded the total 5 million accounts in the Korean stock market. People who own accounts in the Shanghai and Shenzhen exchanges total 197 million. Over 100 million have investments in Chinese shares.
The sizzling stock performance and towering levels of trade are driven by 3G smartphone owners born in the 1980s and 1990s. Over 60 percent of people opening new accounts are graduates of college or with even higher degrees and they trade stocks on their mobiles. The young and bold generation in their 20s and 30s have never experienced market crashes in their lives are fueling a new phenomenon in the Chinese stock market.
Smartphone subscribers total 560 million and 75 percent of them are in their 20s or 30s. The rapid proliferation of mobile information is what keeps the market on a boil. Experienced investors prefer safer stocks with low price/earnings ratios while the young and bold snap up stocks with P/E ratio with naive expectations for further growth. On the Chinese market, stocks with low P/E ratios tread carefully, while high P/E stocks fly high.
The Chinese authorities’ condoning of a robust stock market is also another major factor. Beijing has pledged a shift in macroeconomic focus despite a slowing economy to veer it away from being manufacturing-driven to being consumption-driven. While trying to scale down industrial overcapacity, it aims at expanding demand to sustain growth. A bubbling stock market and various infrastructure ventures like the New Silk Road project are all part of the government’s plan to create new demand.
The world’s second largest economy has been slowing on slumping exports and weak real estate prices. Borrowing costs for companies have gone up. Borrowing costs are over 6 percent and debt maturities are coming around. Banks could run into trouble if they sit on piles of bad debt. Premier Li Keqiang sees at least partial answers to all these problems in the stock market. Interest rates were lowered to help ease borrowing costs and raise asset and collateral value. Public offerings were made easier to help companies raise funds from the stock market. China also allowed issues of low-interest securities based on local government debt. It pumped out short-term and reserve funds to swell liquidity and clamped down on real estate to direct real estate funds into the stock market. This had been the keystone of China’s financial policy this year.
When construction sites are everywhere, liquor sales and working-class diners flourish. But when stock markets rally, luxury items like fur coats and imported cars sell. People dine in fancy restaurants and go on spending binges with their newfound riches. If the 4 trillion yuan construction boom was the work of former premier Wen Jiabao, the 4 trillion yuan stock boom is the creation of Li. A stock index over 4,500 would be enough to revive even a dead economy. The Maotai liquor producer, which suffered painfully from the state-led anti-corruption campaign is getting back on its feet thanks to the rebound in share prices. You have to celebrate with something.
A bull driven by 100 million people can go far and cannot be easily contained. At the current rate, anything would sell on the Chinese market. More than 40 million people trade on the Chinese market a week. Beijing recently warned that the market was going too fast and was showing signs of overheating. But a mobile-savvy young generation pays no heed to what adults or the government say. They only believe in what they see on mobile screens. That is why the roller-coaster ride in China looks so risky and scary. When something goes up, it is bound to go down. The Chinese market has room to go higher, but Korean investors are advised to think about exiting at the right time. They should act flexibly on consumption, transportation, and financial shares while holding onto the New Silk Road and Internet-related shares a little longer.
Translation by the Korea JoonAng Daily staff. JoongAng Sunday, April 26, Page 19
*The author is the director of the China Economy and Finance Research Institute.
by Jeon Byeong-seo