Policies Facilitate a Rising Stock Market

Caifu Magazine | by Caifu Global

Before the Spring Festival people worried there might be a period of fluctuation due to sharp short-term market gains. However, the NPC and CPPCC announced some preferential policies during their annual plenary meetings, known as the “two sessions,” dispelling those fears , and the market  showed strong gains.

In February, the second cut in interest rates by the People’s Bank of China was by no means a surprise. Even the stock market didn’t react as intensely as it did following the first interest rate cut last November. The 7% target growth rate for 2015 specified in the Report on the Work of the Government is conducive to the stock market, because it relieves the worries of an economic slowdown in China. Even though the degree of pressure from China’s contracting economy is unclear to the general population, at least they know the Government will not simply accept an excessively low economic growth rate. To achieve the target growth rate both monetary and fiscal policies will be strengthened. For instance, the People’s Bank of China medium-term lending facility (MLF) has unexpectedly amounted to 500 billion yuan in the past few days, which is undoubtedly a huge stimulus to the stock market.

A huge additional change that exceeded people’s expectation was revealed during the “two sessions” when the NPC and CPPC announced research is being conducted into issuing securities brokerage licenses to commercial banks. Currently, China’s commercial banking and securities industries are under separate operations as a preventive measure for isolating financial risks applied by former Premier Zhu Rongji in response to the Asian economic crisis in the 1990s. The significance of issuing brokerage licenses to commercial banks is not just adding a new line of business to banks, but also means that China’s banking and securities industries will move towards mixed operations in the future.

The public’s historical long-term low valuation of China’s banks is a consequence of their traditional worries toward banks. People are worried about the liability risks led by the decline in short-term real estate prices, the decrease in banks’ profits after interest rate liberalization, the competition from Internet finance against traditional banks, and the inability of banks to maintain large enough reserves from private and corporate deposits in a competitive market. Once China’s banks enter mixed operations, as is the practice in most other countries, the position of banks will surely be strengthened and their valuations will increase.

Facilitating access for pension plans to capital markets is another preferential policy. The objective  for facilitating pensions’ access to the market is definitely to increase investment into blue chip companies on the big board. This, and the other series of measures, will help increase the valuation of the stock market. Since financial stocks account for a large percentage of China’s stock market, as long as financial stocks go up, the space for a sharp drop on the big board will be blocked; and as long as risks on the big board are reduced, capital from various channels will play their respective roles, with hot spots emerging one after another.

In fact, China’s stock market will be faced with daunting pressures; especially the descending valuation of funds and share prices brought by the mass release of new shares after the registration system is implemented for commercial banks to obtain securities brokerage licenses. The preferential policies released recently will definitely stimulate growth on the big board, and will also be needed when the big board is faced with pressures on capital and overall valuation. When there are big short-term increases, fluctuation and adjustment will be conductive to the market’s afternoon sessions.

From a macro perspective, the pressures faced by China’s economy come from such challenges as the fall of real estate price, debts and overcapacity, all of which are centered on the real estate market. Until prices of fixed assets represented by the real estate industry become stabilized, the stimulus policies will not end. That is to say, only when deflationary pressures are transformed into inflationary pressures can the stimulus policies end.

So long as there are deflationary pressures, the economy won’t be stable. Yet the arrival of inflation doesn’t necessarily ensure the economy will step out of the doldrums. When there is inflationary pressure but the economy hasn’t established a stable turnaround, regulators will be in a dilemma for the right timing to tighten monetary policy again at the risk of causing a double dip in the economy. Presently, commodity prices have dramatically gone down. Once inflation appears, prices for bulk commodities will likely substantially rebound; thus either allowing commodities to lead an economic rebound or inadvertently worsening inflationary pressures across the economy.

Even though the preferential policies released recently will likely propel China’s stock market to rise in the near future, there is still a long way to go to rebound from the bottom. Since many uncertainties remain, we will still need to think about how to address future pressures.