Shuli Ren, Bloomberg
Investing in China’s $10.7 trillion stock market is a frustrating business. Over the years, the bull phase has been getting shorter and narrower, making buy-and-hold a losing game.
From trough to peak, the post Covid-19 rally in the benchmark CSI 300 Index gave you only a 65% price gain, unimpressive compared to its climbs in 2007, 2009 and 2015. Animal spirits and investor enthusiasm are dissipating all too quickly. The benchmark has already tumbled 15% from its mid-February high, even though China’s economy is expected to grow at its fastest pace in a decade. So why is the equity bull so transitory?
China’s stock market seems unable to mature. It remains liquidity-driven and follows what’s called the “credit impulse” of the government — a measure of whether credit creation in the economy is accelerating or not. The notion, first introduced in 2008 by Michael Biggs of the University of Oxford, suggests that an economic recovery can happen without a rebound in credit, but a decline in credit is related to a slowdown in economic activity.
Traders seem to subscribe to the theory. Except for the 2015 run, stocks have largely moved in tandem with the nation’s credit impulse.
Unfortunately for stock investors, Beijing is getting more impulsive. According to Bloomberg Economics estimates, China’s credit impulse started to decelerate as early as November, even though the acceleration only began meaningfully in March. In mid-December, at the annual Central Economic Work Conference, policy makers said they wanted China’s debt-to-gross domestic product ratio to stay “largely stable” in 2021, and that the monetary supply would be “largely in line with” the nominal GDP growth. Well, it turns out, they were serious about that.
Compared to the U.S., China tapers its stimulus spending much faster, with helicopter money fading quickly. After the collapse of Lehman Brothers, Beijing launched an extraordinary stimulus in 2009. The 2015 round, though smaller and mostly in the form of shantytown developments, still spanned two years. This time around, the easy money didn’t even last a year. This helps explain why the animal spirits on the mainland are so low. Everyone’s breathless following the swift changes in policy.
For years, Beijing has been trying to cultivate a “slow bull” to avoid the boom and bust of 2015. But how can there be a slow bull if the government’s own credit impulse is fast and furious? If macro policies were sustained and steady, perhaps investors might just abandon their obsession with every top-level policy meeting and focus on company fundamentals. But stock-level research isn’t possible right now, not when there are so many twists and turns in macro policies.
To be sure, China has good reasons to close the liquidity tap as soon as the economy shows a hint of a rebound. It is one of the world’s most indebted nations. As of November, its non-financial debt-to-GDP ratio surged to almost 280%, from 254% a year earlier.
Still, sharp policy turns only create panic. Beijing needs to steer steadily, or else everyone will get motion sickness. Shuli Ren, MDT/Bloomberg
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