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".

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