It makes sense that many believe there won’t be a bull market during the RMB devaluation cycle because capital outflow is inevitable during this cycle. Throughout its short history of just several decades, China’s stock market never witnessed a bull market during currency devaluation cycles. The RMB appreciation played a critically important role in driving up China’s largest ever bull market lasting from 2005 to 2007. However, the US stock market kept rising during the period from 2009 to 2014 while the USD continued devaluating. This shows that bull markets are not necessarily linked with currency appreciation cycles or depreciation cycles.
As capital outflow is inevitable during the RMB devaluation cycle, a question arises: will the outflow of capital lead to a loss of stock funds, or can the rising stock market offset the capital outflow? To answer this question, we need to determine whether the Chinese stock market has enough endogenous power to withstand the capital outflow.
Both historical experience and expertise show that the adjustment isn’t over and the overall market dynamics still need to be shaken up at the bottom level. As I mentioned in my previous article “Embrace the Government Stabilization Fund Era”, more than 1 trillion RMB national bailout funds have passively become stock market stabilization funds, preventing the overall stock market from falling steeply to a certain extent.
From the macroeconomic perspective, China hasn’t completed its industrial restructuring e ort. However, the recent situation of China’s steel and coal sectors show that the Chinese government is trying to find alternatives to prevent such sectors from being eliminated in a more drastic way. It proves to be effective to replace industry elimination through competition with state-led consolidation, which may be characterized by a planned economy.
Another important factor is the mixed ownership reform, which was mentioned in the Report to the Eighteenth National Congress of the Communist Party of China. Once it can be launched successfully, the mixed ownership reform will no doubt provide new impetus to the Chinese stock market.
According to a research report released by CAIFU magazine at its annual conference on March 16, 2016, the most difficult period for commodities had passed and the upward stage will come in the future. Currently, commodity prices have risen dramatically, far higher than that at the bottom region earlier this year. Special attention should be paid to in ation during the next stage.
For the Chinese stock market, the RMB devaluation will be beneficial for some sectors. No matter whether it is bull market or not, a partial bull market will still be possible as long as the whole stock market does not plunge. The opportunity of this time is quite different from that of 15 years ago, because the same hot spot won’t happen again. New hot spots will appear in places which used to be overlooked. In the future we should pay special attention to such fields as large cyclical stocks, stocks of state-owned enterprise reform themes and commodity-type in ation-protected stocks.
If the reforms of the supply side and the state- owned enterprises do change the expected valuation of some blue-chip stocks, then the stock market won’t witness a slump as long as the price of these blue-chips keeps rising. Although people always lose their way amid short-term volatility, maybe we will ultimately nd that we are actually in the bull market when we look back several years later, as was explained in the article named “Embrace the Government Stabilization Fund Era”.