Still too early to predict the economy

The Shanghai Composite Index has risen frequently since the beginning of 2009, helping to restore confidence in China's economy.

The stock market is usually seen as a barometer of the economic well being of a country. Does the current bull run mean the Chinese economy has walked out of the shadow of the world financial crisis and is already on its way to recovery?

Generally speaking, stock market performance is a predictor of economic health three to six months ahead. A rising stock market is a strong sign that points to the economic recovery. That explains why US agencies monitoring economic prosperity, such as the Conference Board, usually make the American stock market one of the leading indicators.

But the Chinese stock market is different. It is an emerging market, and is still undergoing transition. Its signaling function to the economy, therefore, is still quite weak.

Historical statistics show that China's stock market was not a leading indicator of economic health but rather followed the actual economy with quite a time lag. Agencies monitoring China's economic performance did not adopt the A-share price index as a leading indicator when they conducted their analysis.

The current stock market turnaround, which started on Oct 28 last year, has been based on four main factors.

First, regulators have exerted direct interference in the stock market. Large shareholders of listed companies, especially those companies in which the State holds controlling shares, have been encouraged to increase their stakes. Central Huijin Investment Co, an arm of the country's sovereign wealth fund, has bought shares in three major State-controlled banks on the stock market. Moreover, the government has canceled the stamp tax on purchasing shares while keeping the tax on selling shares unchanged.

Second, China has rolled out a series of policies aimed at stimulating the economy, including the 4 trillion yuan ($588 billion) stimulus package, stimulus plans for 10 key industries, central bank cutbacks on interest rates and the reserve requirement ratio, and policies aimed at encouraging commercial banks to lend.

Third, there has been adequate non-governmental funding. New lending by Chinese banks has been on the rise in the first three months of this year, with 4.58 trillion yuan ($670 billion) of new loans extended.

Fourth, stock prices fell to such low levels that there was scope for an upturn.

Therefore, it can be said that the Chinese stock market's current turn for the better can largely be attributed to government policies, capital injection and technical factors, rather than expectations from investors of higher earnings for listed companies.

The Chinese stock market is still short of sending clear-cut signals about the shape of the economy and its speculative characteristics remain strong.

That, however, doesn't mean that China's stock market has no signaling function at all about economic prosperity; nor does it mean there is no indication of economic recovery in China. In fact, China's economy has already shown signs of improving.

But it is still too early to predict whether the economy will see a return to its previous fortunes.

 

(Liu Huangsong, a researcher with the Institute of Economics, Shanghai Academy of Social Sciences)

 

China Daily 2009-05-04