China’s Stock Market: A New Era

Caifu Magazine | by Caifu Global

20171220 StockMarket

Generally speaking, the global economic cycle is undergoing a series of major changes. Worldwide, the United States and European economy has bottomed out in their recovery. Externally, the worst-case scenario did not really happen (outside of China). Domestically, as stated in the official Report to the 19th Communist Party of China (CPC) National Congress: “… What we now face is the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life.” Therefore the government’s focus has switched to quality development rather than simply economic growth. More importantly, the political situation in China has stabilized and governmental policies will be carried out more smoothly, which all will contribute to a better environment for the stock market. 

In terms of the domestic economy, corporate earnings growth continue to go up sharply for the second consecutive month in September, reaching a new high since 2012. Earnings have increased significantly for all of the up-to-downstre am, resulting in continued restoration for corporate balance sheets. China's monetary policy will remain neutral; mainly related to the real estate market instead of the stock market. The government will not ease its strict monetary policy simply because it won’t let the real estate bubble expand, yet it will not tighten its monetary policy either, not to burst the real estate bubble initiatively.

In the near future, any possible major impact on China's financial markets would be from the real estate front, since it affects the flow of funds profoundly. As we have mentioned many times, the glorious era of real estate is over. For the past decades, most of China's capital has poured into the real estate market, and when it becomes less lucrative, some of its funds will surely divert to the stock market. It is believed that within the next decade it will yield higher return on equities investment than in real estate.

Not only the direction of funds flowing will change and part of real estate funds will go into the stock market, but also the structure of that capital will be much different compared to what is was before. In the past, whenever the Chinese stock market was thriving, it was a vigorous and buzzing scene. Whenever it went down, it crashed spectacularly, leaving a big mess all over, which was determined by the fact that the Chinese stock market was primarily composed of retail investors. But in the future, it will become more and more difficult for retail investors to survive, while professional institutions will be growing stronger, which have completely different ways of thinking and practice compared with retail investors.

There are more initial public offerings (IPOs) in the market and it’s getting easier for them. Although the registration system will not be in place soon, a large number of IPOs has made it a registration system de facto. The big bull market in China in 2005 was because of full circulation reform, and the registration system reform has the same weight to it, which will render the shell resources worthless and the small-cap stocks will no longer enjoy the premium simply because of their shell resources. People will focus more on performance, and they will favor the good performance of large-cap stocks.

Much has been said about the unchanged truth in the stock market is change itself. Since the direction of funds flow is changing, the funds structure is changing, the composition of the market is changing, and the operation mode of the Chinese stock market is also bound to change. The industrial upgrading, consumption upgrading and policy integration will be the main force determining the future market.

Just one year ago when the Chinese stock market was still harsh and miserable, we stated that within a few years we might come to the realization that we had been in a bull market all along. Shocks and twists aside, the next three to five years will see a slow bull in China's stock market, lingering when going up and terrifying when falling down, nevertheless with constant new highs.