China’s stock markets tumbled by around 40% over four weeks from June 13, 2015. Market observers were astonished by the significant market intervention that Beijing took to prop its markets in the weeks that ensued. The People’s Bank of China (PBoC) implemented a surprise interest rate cut. Moreover, the Chinese government relaxed collateral rules and even slowed the pace of initial share sale by Chinese firms.

 

For now, the measures seem to be taking hold. Trading volume returned in Shanghai. The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.6% from this Monday, extending an impressive 11% rise this month. Have China’s capital markets stabilized?

 

We have two competing views on where China’s capital markets are headed. One on side, we have Xia Le, the chief economist for Asia, BBVA, who believes that the short-term future of China’s capital markets are up in the air, and that the country’s markets face a number of  serious long-term and short-term threats.

 

On the other, we have Will Leung, head of investment strategy, Wealth Management, Standard Chartered Hong Kong, who is certain that China’s markets have recovered since business confidence has returned. Both perspectives are very different and come from different economic and financial approaches. 

 

Leung: Investors’ risk appetite has returned in October, helped by targeted policy easing in China and increasing expectations for the Fed to postpone rate hike. The China market is moving higher after the National Day holiday. Compared to what we have seen in Q3, investors are now less concerned about the outlook of the China market. Such move is also in line with the development in other equity markets.

 

Xia:  It is true that the stock market has recently become less volatile than before. But I think it’s a far cry from stabilization. Put differently, the market condition is still fragile and subject to a number of long-term threats. Chief among them is the bulk of shares which have been acquired by the national team as part of the authorities’ efforts to prop up the market during market selloffs. If handled improperly, the exit of the national team from the market could itself lead to a bout of selloffs or even market crash.

 

 

Leung: The China market has recovered after business confidence stabilized, coupled with the authorities’ support to the automotive and property sectors. The news also helped global equities bounce from two-year lows. While sentiment clearly improved, we believe China needs to take bolder growth-supportive steps before we can see sustainable rebound in China stocks.

 

Xia: We need to give certain credit to the authorities’ interventions for the lull of the stock market. However, what the authorities have done is akin to kicking the can down the road. The imminent crisis has been defused but the long-term threat was generated at the same time. With the interventions, the market is almost impossible to heal itself given a number of inherent deficiencies. For example, the retail investors account for a too large portion of the investor group, making the market extremely vulnerable to the herding behaviour during financial turmoil.    

 

 

Leung: We remain positive towards the China market but are now looking for signs of further policy easing and greater clarity on growth drivers. China’s next five-year growth plans and economic data will be the focus in the coming weeks. The CNY has now rebounded from the four-year low in August, which helps ease concerns about further depreciation and provides respite to the market.

 

Xia: As I have explained, the “stabilization” is likely to be short-lived and everything could happen in the coming months. The increasing uncertainty of the external environment is another important menace to China’s stock market. At this juncture, it’s unwise to assume the temporary stabilization could persist. Both investors and policymakers need to be better prepared for adversities on the way forward.