Gloomy markets defy expected growth
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E-mail China Daily, December 17, 2012
The Chinese stock market endured one of the world's worst performances this year despite the country enjoying a globally leading economic growth rate and financial institutions raising expectations for the coming months.
In an apparent contradiction of the modest economic recovery suggested by the recent improved indicators, the benchmark stock index remained lower than 2000 for six days after Nov 27, down by about 11 percent this year.
A report from the China Securities Index Co showed that in the six months until November, about 4.41 trillion yuan ($708 billion) has evaporated from the two stock markets in Shanghai and Shenzhen. Everyone holding the more than 560 billion accounts of A shares has lost 78,700 yuan on average.
As ever in the Chinese market, elaborate charts for economic prediction and meticulous analysis are not as effective as policy signals in changing investment decisions.
Positive statement
The benchmark index surged for two straight days after Dec 4 from the 46-month low point when the Politburo Central Committee of the Communist Party of China released a statement that pledged it would continue to stabilize economic growth.
Existing macroeconomic policies will remain targeted, effective and finely tuned, according to the statement. It vowed to promote urbanization and reforms in the areas of taxes, the price of resources and healthcare.
In addition, the statement also highlighted eight explicit requirements to avoid extravagance and bureaucracy, including cutting spending on official trips and reducing traffic controls during political events.
It is a signal that the new leaders are making efforts to improve work efficiency, said Helen Qiao, chief economist for Greater China at Morgan Stanley.
The statement provides hope for more reforms in the near future and will strengthen market confidence, Qiao said.
On Dec 5, the Shanghai composite index jumped by 2.87 percent, the biggest one-day increase since Sept 7.
"A reversal in the stock market is likely to take place in the short term," said Li Daokui, director of the Center for China in the World Economy at Tsinghua University.
Unreasonable worries on future economic downside risks by investors, especially individual shareholders, have weakened confidence, which was the most important reason for the sharp decline of the stock indexes, said Li.
"The central economic working conference, which opened on Saturday to set the policy stance for the next year, is expected to deliver a sign that the economic environment will remain sound in the coming years," he added.
The many positive economic indicators since the end of the third quarter will help stocks rebound, according to Li.
November industrial output grew 10.1 percent year-on-year, from 9.6 percent in October and 9.2 percent in September, reaching an eight-month high, the National Bureau of Statistics said on Dec 9.
In addition, the manufacturing Purchasing Managers' Index increased to 50.6 in November from 50.1 in October, the bureau said, showing that the expansion of the manufacturing industry is firming up.
The restarting of rail investment, continued development of infrastructure projects and signs of a recovery in global technology demands have all contributed to gains in fixed investment and industrial production over the past few months, which could confirm an uptick of the growth in the fourth quarter, according to a report from Moody's Analytics.
"Just know this - the performance of the domestic equity market is not so tightly correlated with the overall economy," said Wang Tao, chief China economist with UBS AG.
In the past few quarters, corporate earnings have declined sharply in line with the economic slowdown. The net income of big industrial business dropped to negative 1.8 percent in the first nine months according to the statistics bureau.
In the light of the gloomy business environment, Wang said the earnings growth of listed companies excluding financials in the A-share market first dropped sharply and then turned negative this year.
"There seems to have been a continued de-rating in the A-share market over the past three years, with the current price-earnings ratio lower than during the global financial crisis," Wang said.
In the first three quarters, all the 2,471 companies listed on the A-share market gained a net profit of 1.5 trillion yuan, lower than the 1.61 trillion yuan by or 2.07 percent from the same period last year, according to data from Wind Information.
The data also showed that about 86.8 percent of the A-share companies achieved net gains in the first nine months, less than the 91.26 percent in 2012.
Economists' views
Chang Jian, an economist with Barclays Capital, said investors' weak risk appetite "could well reflect rational investor behavior given the outlook for policies, growth and corporate profits".
In October, thanks to the increasing number of investment projects and export orders, the industrial companies' profit rebounded fast to 20.5 percent up year-on-year, driving up the accumulative net income in the first 10 months to a 0.5 percent growth compared with a year earlier.
A report from Goldman Sachs said A shares will see a rebound next year and the CSI 300 index that tracks the most active 300 companies' shares in both the Shanghai and Shenzhen stock exchanges is likely to surge by 26 percent because the companies' gains may increase fast.
As China's growth may remain modest and inflation pressure is likely to rebound in the future, "industrial companies will face continued headwinds and a requirement for innovation and upgrades", said Chang.
The Chinese Academy of Social Sciences released its outlook for economic growth and the stock market next year in the first week of December. It said the domestic economy will go through a long period of industrial restructuring and reform of the financial system, amid which it is unlikely to rebound to double-digit growth.
"The A-share index is not expected to sustain an upward trend next year and the Shanghai composite index may fluctuate around 2000 to 2500 points," the CASS report said.
The sluggish performance of the stock market has pushed back many companies' plans to list publicly. In the first 11 months, 196 companies listed on the exchanges in Shanghai and Shenzhen. The number is much less than the 356 in the whole year of 2012 and 476 in 2011, according to data from Zero2IPO, an integrated service provider in the venture capital and private equity industry.
The new listed shares issued during the January to November period raised $22.2 billion, compared with $61.53 billion in 2012 and $105.35 billion in 2011, Zero2IPO said.
Although it has proved to be a particularly challenging year for capital raising, the boom in initial public offerings between 2007 and 2010 raised a large pile of capital and created too big a pool waiting for more funds to fill it.
At the moment the value of A shares accounts for 59 percent of the total Chinese equity capital market volume in 2012, compared with 63 percent in 2011, according to a report by Dealogic Holdings Plc, a financial data provider.
The IPOs issued in the mainland markets until Dec 7 accounted for 18 percent of global IPO volume of $115.6 billion, the lowest since 2005's 14 percent. It marks the third consecutive decline since 2009, according to Dealogic.
Listing
At the same time, there are many companies awaiting approval to list from the top securities regulator.
By the end of November, the number of companies on the waiting list for IPO approval had increased to 809, 155 for the Shanghai main board, 338 for the Shenzhen small and medium-sized enterprises board and 316 for the growth enterprise market, also known as ChiNext, the China Securities Regulatory Commission said. Market expectations of future reform of new-share issuing is rising.
Despite progress in stock market reforms in recent years, structural and governance issues remain and continue to plague China's equity market, according to Wang, the UBS chief China economist.
The current problems are focused on the IPO process, insufficient transparency in company disclosures, inadequate investor protection and insider trading, she added.
"These issues may in part stem from the fact the government often sees the stock market more as a source of financing for the economy than as a way to improve capital allocation," said Wang. "The CSRC launched a new reform initiative in 2011 to tackle some of these issues, which has been welcomed by the market, but it will take time to see major progress."
On the policy front, regulators have given clear indications they are loosening controls after numerous policies were rolled out to promote reform and innovation.
Li Xiaoxue, the executive vice-chairman of the China Association for Public Companies, suggested many times this year an improvement to the corporate governance of listed businesses to boost market confidence.
"The standards and high-quality of company operations are the basis for attracting long-term investment, increasing information transparency, protecting investors' interests and facilitating the healthy development of the capital market," said Li.
The public companies association was founded in February. It provides professional guidance and suggestions based on international seminars and research, aiming to improve cooperation in governance.
The poor performance of the share market has directly influenced the income of securities companies this year.
Among the listed 19 public securities, 15 saw a total gain of 463 million yuan in November, a decline of 23.53 percent from October, Wind Information said. Five listed securities companies suffered losses in November, the highest level this year.
An annual survey of 109 securities companies by KPMG China indicated that brokers are facing growing pressure and challenges as market competition intensifies and are increasingly looking at ways to widen their product offering and services.
The gross operating income of the sector declined 29 percent year-on-year to 136.3 billion yuan in 2011, while net profit dropped much faster at 50 percent to 39 billion yuan, the survey shows.
"Traditional brokerage accounts for 52 percent of the sector's gross income. This business saw its income fall 36 percent due to dwindling trading volumes and commission price wars," the KPMG report said.
Tony Cheung, a partner with KPMG China, said that the IPO systems will be further reformed, while securities companies will strengthen their governance structures and incentive mechanisms.
"These reform and innovation initiatives will help domestic securities companies to transform their businesses to enable long-term growth," he said.
The development of a multilevel capital market will accelerate because the top securities regulator is determined to deepen system reform, while at the same time it can promote more innovation of financial products, according to Bonn Liu, another KPMG partner.
"The securities companies' traditional business model needs to change, therefore, to meet the new realities," Liu said.
Confidence
The erosion of investor confidence has led to net fund outflows in the A-share market this year. In order to supplement the capital pool, the government has taken major steps this year to broaden the financial channels for foreign institutional investors by lifting quotas for qualified foreign institution investors.
According to the State Administration of Foreign Exchange, in November, seven new foreign investors were approved as QFIIs, raising the number of total qualified institutions to 199 as investment amounts reached $33.57 billion.
The QFII investment limit was raised in April to $80 billion from $30 billion, but it is still too tiny compared with the total tradable market cap in the A-share market of 15.5 trillion yuan.
"The participation of institutional investors, both domestic and international, should also grow over the medium term," said Wang from UBS.
"In the coming quarters, we do expect corporate earnings to recover, along with the economy. We also expect the authorities to continue to push for IPO reforms and improvement of disclosure and supervision, which should eventually help to improve market confidence," she added.
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