Suddenly China's stock market has boomed. In November 2014 the Shanghai Composite Index was around 2700, and today the market has hit 4574.65, a record high in six years. With monetary policies easing and the official media backing, it is no wonder why the stock market is heating up.
It is noticeable that two groups of people, aside from institutional investors, have played a significant role amid this bullish wave. The first group is senior-aged Chinese women, or dama, who in Chinese tradition are treasurers of the family savings. They have abundant experiences dealing with family portfolios, and sometimes the performance of damas even outstrip that of a professional investment banker. The other group is the gen-90 young people (including me), who invested their generous amount of pocket money into the stock. Not only did the market accumulated mass leverage capital, it also absorbed a considerable proportion of household savings, both of which have contributed to inflated asset prices that have nearly doubled in less than half a year.
The bubble theory emerged again for China's stock market rush, although the bubble can only be observed after it collapses. It is reasonable to deem China's stock prices overvalued at present, taken China's not so satisfying first season economic data into consideration. So what will happen after the bubble burst is of greater concern. Of course, there will be people bearing the loss. But more importantly, what would the mass capital turn to invest after they escaped from the stock?
On March 30th, tax and rate cut for real estate purchase were finally announced in order to support China's housing market. With high existing inventory and newly added ones, this policy hasn't really taken its effect until now. However, apartment inventories are now declining at fast rate, and it is very possible that between June and September housing price in China's major cities will rise sharply. Traditionally China's individual investors favor housing investment more than stocks and bonds because of its immovable property nature. However, after the 2014 adjustment, real estate investments in China's minor cities are no longer safe. It is therefore a trend-to-be that the mass liquid capital out of the stock market will move into the estate market of China's mega cities in the second half of 2015, and a similar boom in housing price would be witnessed after the stock market bull makes its curtain call.
China's stock market boom: what's after the bubble?
Pitfalls of China's New Model
对于中国来说,是三月份一个月会议。首先,中国共产党和中国人民政治协商会议州议会。然后,博鳌亚洲论坛,达沃斯相当于中国人。这标志着在经济意义上的中国新一年的开始,因为进入的政策和发展目标的信号在这些约定好释放。对于2015年,允许较低的增长速度,更多的结构性改革将成为“新常态”,并根据不同的经济部门,保持了7%的增长就足够让中国的十年末达到其目标而这样的年度目标,其实是充满挑战鉴于全球经济形势。更重要的是,新的经济增长引擎正式提出,如互联网产业和技术创新,皮带和道倡议连同其理事机构的AIIB(亚洲基础设施投资银行)。然而,过多的乐观情绪中引起这些镀金的前景和朗朗上口的口号,以支持新的中国模式已经成为微博上的hashtag。然而耐人寻味的新兴企业和互联网企业都,前提是之前中国的经济可能需要依靠 大量的 他们。
尽管许多人认为中国的繁荣的未来产业升级和创新,传统产业,其中许多是由房地产市场的增长和政府投资驱动的谎言,还包括大部分的GDP,并提供特别是在欠发达省份大规模的就业机会。在另一方面,创新的思维方式是根据openminded的教育,鼓励创造性和多样性栽培,而在中国的学术界正在进行的改革可能会达到这样的目标,希望只能由下一代(创“00”)。因此,创新推动成长的愿景应该,也不会注明唯一放弃现有的发展道路,这是投资驱动,政府指导的。相反,从传统行业的平稳过渡到先进的行业就必须政策优惠的老。其一,过去的房地产热潮和基础设施扩建繁荣能源,机械,原材料和家庭设施的市场。在这些业务人员需要重新培训的财政支持,进入新的行业,或将面临失业和工资缩水。其次,技术创新本质上齐头并进的工业活动,并创造性地解决环境污染,提高生产力,提高效率等,可根据内部政策支持范围。一切的一切,也有了解中国提出的新的发展道路很多陷阱。虽然巨大的潜力存在于中国的服务业和消费者的需求,新兴的小型或农业企业和互联网企业可能只是权宜之计,当投资和出口驱动的模式再也无法维持。这样一来,中国的审判日已经到来。
周一,3月30日,伴随着中国的财政部中国人民银行宣布新政策水桶中,除了削减在月初的速度支持住房市场。这包括削减交易税,并要求首付的住房抵押贷款。在财政方面,财政大臣娄肯定,更多的政府债务互换,可能在大约十万亿日元的大小,将全年实行,并且将有大约七万亿日元批准的基础设施投资理财的2015年。我的许多同事,谁比我年长,并一直在做经济研究工作多年,发现今年的政策方向类似,在2009年。 从那时起, 高通胀和咆哮的房价主义及其对扩张性政策和热心市民的反感对不同成长之路。然而,中国的新常态在于较低的增长速度温和通胀和健康的发展道路的精髓。这些后果。而类似的策略重新出现,它们只是旧装置到一个新的末端。
Deflation of the Chinese Characteristics
China's February statistics are all out today. CPI rose to 1.4% from 0.8%, not adjusted for Lunar New Year's price effect. PPI negative growth deteriorated to (-)4.8%, indicating shrinking industrial activities for the 36th month. Growth in total volume of consumable retail, in added value of above-acale industries, in fixed assets and real estate investment all fell considerably and were around 1% lower than expected.
Picture Source: Baidu |
With the deeply-rooted tradition of seeking financial stability, deflation in China will cause much more severe consequences than on other economies. As a market economy built on five-year plans, which is hard to not ignore each and every aspect of the economy, industries struggle harder to recover from the business cycle mechanism and obsolete business funded by state capital may grow to big to fail. Household consumption would also fall sharply during deflation and over-thriftiness will dominate again, both due to shrinking returns on property investment (over 70% of Chinese household wealth) and precautionary worries on rising medical and welfare expenses. Asset prices would be tangled into a downward swirl driven by pessimistic expectations and, because China's social insurance funds were largely invested into the stock market, aging problems would intensify and arouse social upheaval. More importantly, no structural reforms could continue delivering positive support for growth under deflation, let alone business innovation and emerging entrepreneurship.
Preempting deflation in China's situation requires not only monetary easing or targeting on inflation. Also a strong and clear policy attitude should be expressed. Although allowing a slower growth rate benefits the economy from a structural perspective, public policy should not beat off the bushes and only keep "calm" faced with downward pressure. As the former chief economist of the World Bank Justin Lin Yifu puts it, China still has the potential of annual growth rate at 8% for the next two decades based on his model. Given China's rather low GDP per capita and capital resources per person, this is a necessary rate to ensure the general welfare improvement of the Chinese as well as China's evolution to a developed economy. According to Mr.Lin, fiscal investment on infrastructure should remain the foremost engine for growth and help facilitate reforms in areas such as the financial market. It is noteworthy that many rural areas in China remain underdeveloped and many agricultural facilities are obsolete, both of which yearns for fiscal support. China's economic growth still abounds with more opportunities than challenges. However, lack of policy attention on these under-exploited potentials will hurt more than deflation.
China's Consumer Demand: A Caged Growth Engine
Source: Baidu |
Finally into the easing club: PBoC to cut reserve ratio by 0.5%
The PBoC have just announced its decision to cut commercial bank reserve ratio by 0.5%, marking a new round of expansionary cycle for China's monetary policy. Renminbi has depreciated drastically in recent days. In December China have suffered from the greatest capital outflow since 1998. I have analyzed before that China has to implement expansionary measures to preempt domestic deflation risks. While the most efficient policy now may be another interest rate cut, succeeding capital outflow would cause intensified systematic risk for the domestic financial market. With the 20% more reserve ratio an unnecessary barrier to multiplying effect, cutting the RR can serve to both release liquidity and maintain relatively stable exchange rate market.
The timing of this policy is special, too. With China's Lunar New Year two weeks ahead, PBoC has greatly boosted market optimism. I also expect another interest rate cut to be announced before or after National People's Congress coming in March, where China's 2015 growth rate target will be determined. Until then, China will join the club of monetary expansion with Eurozone, Canada, Australia and so on with a real ticket in hand.
Thank you for reading and Happy Spring New Year!
RMB Internationalization: Implications for Exchange Rate
Stepping into 2015, Renminbi has made several concrete achievements toward the realization of internationalization. According to SWIFT, RMB has become the fifth most frequently used currency in the global market in terms of its share in international payments. It is also noteworthy that the total value of payments transacted in RMB has boomed by 102% within 2014, whereas other currencies only grew on average by 4.4%. Meanwhile, the International Monetary Fund (IMF) will discuss the inclusion of RMB into the SDR basket in November, when the selected group of currencies is re-evaluated every five years. On 21st January, the PBoC has agreed with SNB to establish yuan clearing and the RQFII (RMB Qualified Foreign Institutional Investors) pilot region in Switzerland.
Picture via Google |
We saw RMB depreciates drastically towards USD in the past two days, which forms the weak expectation on future RMB rate as shown on RMB one-year NDF. In the long run, however, there is limited space for yuan's further depreciation. Although cheaper yuan stimulates export, to a greater extent China suffers from capital outflow. The PBoC has practiced reverse repo this week to keep stable flow of liquidity, and more discretionary guidance in the currency market are possible after the Federal Reserve announced its interest rate decision. In general, there would not be radical reflation for RMB to stimulate growth in 2015 even if the Fed practices interest rate increase. Instead, yuan will seek a rebalanced rate with dollars in a gradual manner so as to promote its long term goal of becoming an internationalized reserve currency.