Chinese stocks: follow the politics

It’s been a rollercoaster few days for investors in the Chinese stockmarket.

It's been a rollercoaster few days for Chinese stocks. On Friday the China Securities Regulatory Commission made it easier to short-sell stocks, while also tightening margin lending (making it harder for investors to use borrowed money to bet on shares).

Shares fell in response. But on Sunday, the People's Bank of China slashed the amount of reserves that banks need to hold, effectively loosening monetary policy seen as good for stocks. The market rallied in response.

The two decisions demonstrate the difficult line that Chinese policymakers are trying to walk. "China is reeling from a property downturn, overcapacity at its factories and an increase in local debt," says Alistair Osborne in The Times; the latest GDP data show the economy expanding at an annual rate of just 7%, the lowest in six years.

Hence the desire to stimulate the economy by pushing banks to lend. By contrast, stocks are still charging ahead, with the main market having doubled in the past 12 months. Trading accounts are being opened at the rate of one million every two days, says Craig Stephen on marketwatch.com. Against that backdrop, "a warning for equity bulls to cool off certainly looks overdue".

But the cut in the reserve requirement ratio suggests that policymakers have come down on the side of boosting the economy, says The Economist's Free Exchange blog. While a cut was always likely at some point, the timing is earlier than expected and the size of the move (one percentage point) is larger.

"Such a decisive move signals Beijing is more worried about the slowdown than previously thought," adds Alex Frangos in The Wall Street Journal. "It is also a sign that officials are hardly concerned about blowing a stockmarket bubble."

The result is that stocks are likely to keep rising for now, says Capital Economics. "We don't see any solid foundation in economic data for recent stockmarket gains, but as long as policymakers are still easing, it is hard to see the rally petering out anytime soon." Overall, saysThe Wall Street Journal, it's a reminder that, "in China, it pays to follow the politics first, and then the money".

Recommended

What's behind Sri Lanka’s crippling debt crisis?
Emerging markets

What's behind Sri Lanka’s crippling debt crisis?

Sri Lanka has been hit by a triple whammy of economic shocks and has gone to the IMF for a bailout. It may just be the first domino to fall in a globa…
20 May 2022
Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
Tech stock crash – dotcom bust 2.0 is upon us
Tech stocks

Tech stock crash – dotcom bust 2.0 is upon us

It’s carnage in the tech sector as the market crashes. But that spells opportunity for canny investors, says Matthew Lynn
19 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
19 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022