First, let’s just say China isn’t like Greece.
It’s obvious when you take just two seconds to think about it. China controls its own central bank and currency. Greece has no control over its currency, the euro. So it’s central bank is pretty useless. China’s economy is growing about 7%. Although slower than last year, the US would still kill for this rate. On the other hand, after climbing into positive growth last year, the Greek economy is back in a recession. Greece’s gross domestic product fell 0.2% in the first quarter of 2015.
But if you listen to all the pundits spouting doom-and-gloom about the Greek debt crisis, they sound like China is in the same boat. Yes, the Chinese stock market fell 20%, the unofficial definition of a bear market. But, let’s just say things are different there.
And that’s our second point. It’s good when the government has your back. While government-backed financial markets have their issues, Asia Unhedged wants to focus on the positive.
Which brings us to the main point; China’s stock markets rebounded strongly on Tuesday. The Shanghai Stock Exchange Composite Index jumped 5.5% to 4,277. The Shenzhen Stock Exchange Composite Index climbed 4.8% and the ChiNext Price Index, which tracks small-stocks, leapt 6.3%.
Let’s recap. Chinese stocks fell over the previous two weeks primarily because a drop-off in liquidity: tighter market requirements, cash lock ups in initial public offerings and a 30% decline in new brokerage accounts.
“Margin debt on the Shanghai Stock Exchange fell for a sixth day to 1.36 trillion yuan ($219 billion) on Monday, the longest stretch of declines since June 2014,” reported Bloomberg.
This is good. It’s pulling speculators out of the market. Meanwhile, there is a pile of institutional cash — especially on the pension side — ready to come into the market.
Investors were spooked when the People’s Bank of China cut interest rates on Saturday for the fourth time since November. Some viewed it as an act of regulatory desperation rather than support. But a few things happened on Monday that got lost in the news about Greece.
“China will allow its basic endowment pension fund to invest in stock markets, according to draft regulations posted on the Ministry of Finance’s website,” reported Bloomberg. The fund also will be allowed to invest in domestic bonds, stock funds, private equities, stock-index futures and treasury futures, according to the draft.
The proposed rules will allow up to 30% of the pension fund’s net value to be invested in stocks, funds and stock-related pension products. The basic pension fund ended 2104 with 3.59 trillion yuan ($583 billion), the official Securities Times reported in May.
“The access of the pension fund as a long-term investor will remarkably increase liquidity supply and will benefit the sustainable, healthy development of the stock market,” Wen Bin, a researcher at China Minsheng Banking in Beijing, told Bloomberg. “The Chinese market will be stabilized by the policy.”
Also, “BlackRock, the world’s largest money manager, plans to start using the Shanghai-Hong Kong exchange link, endorsing a program that has so far been slow to lure international investors,” reported Bloomberg on Monday. “The money manager already has about $1.5 billion of quota to buy mainland shares through separate programs for qualified foreign institutions.”
That’s real money, not speculators. We like that trend.