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Print Edition> Business
UPDATED: January 25, 2014 NO. 5 JANUARY 30, 2014
Market Watch No. 5, 2014

Stock Market: Waiting for a Rally

The initiation of deepening reforms following the Third Plenary Session of the 18th Central Committee of the Communist Party of China in November 2013 and the U.S. Federal Reserve's (Fed) exit from quantitative easing (QE) are almost certain to exert a significant influence on China's stock market in 2014.

While deepening reforms will give a boost to the ongoing transformation of China's growth model and spark another round of economic expansion, the QE exit has pronounced an end to the feast of cheap money spanning five years, indicating that great changes will take place in the risk preference, flow direction and interest structure of global capital.

What is traded in the financial market is credit, as is the case with the banking and stock markets. The question is where such credit comes from. Differentiated by access to credit, the operational mode of a nation's financial market will determine the prosperity of its stock market.

Given the evolution from a planned economy to the current market economy, credit in China's stock market largely depends on government or implicit guarantees. That results in differences in transaction behavior and cost and profit analysis. For market-oriented credit risks, investors pay the cost and reap profits, but for government-backed credit risks, profits are harvested by investors, and the cost may have to be covered by the public. That's why market speculations and manipulations are overwhelming and the interests of small and medium-sized investors are pretty vulnerable in China.

At the third plenary session, a focus was laid on the predominant role of the market in resource allocation, aiming to promote market-oriented credit relations. The measures relating to initial public offering (IPO) reform and protection of small and medium-sized investors released right after the third plenary session are considered basic systems to re-establish credit relations in the stock market. Nonetheless, it will be an arduous journey. In 2014, China's stock market will continue proceeding with reforms.

On the other side, the impact of QE tapering should not be underestimated. By reiterating that reduced bond purchases will not necessarily result in monetary tightening, the Fed hopes to neutralize the consequences of QE on the global market.

In the past five years, asset prices in a few emerging economies have been bloated in many ways, such as currency appreciation, skyrocketing stock prices, real estate bubbles and soaring commodity prices. However, as the era of cheap money comes to an end, these overheated assets will witness sharp drops in price. To name but two, the collapse of gold prices and dramatic currency depreciations in India, Brazil, South Africa, Indonesia and Turkey.

As far as China is concerned, the real estate sector is most likely to be the first affected by QE tapering. In most parts of China, housing prices have surged more than 10-fold. The culprits behind speculations are over-expansion of bank credit and social financing, as well as over-leverage.

To counter the impact of the QE exit, Chinese regulators have unveiled a bundle of policies to prevent liquidity flowing into the real estate market, such as reorganizing shadow banking, cleaning up local government financing platforms, and restricting the monetary market. In other words, capital will flee the housing market and seek new investment opportunities, most probably in the stock market, so long as reforms are carried out smoothly, the economy picks up momentum and the stock market edges toward stability.

In short, deepening reforms and the QE exit will have a positive impact on China's stock market this year, but their effect on propping up stock prices will take time to become apparent.

This is an edited excerpt of an article by Yi Xianrong, a research fellow with the Institute of Finance and Banking at the Chinese Academy of Social Sciences, originally published in Securities Daily


Polypropylene Futures

On January 17, the China Securities Regulatory Commission (CSRC) announced it had approved trade of polypropylene (PP) futures contracts at the Dalian Commodity Exchange (DCE) in northeast China.

The exact date of the launch of the futures will be decided by the exchange, said CSRC spokesman Zhang Xiaojun.

China is the largest PP consumer in the world with an average annual growth rate of more than 10 percent. In 2012, PP consumption was close to 15 million tons, with applications in packaging, household appliances, textiles, automobiles and construction.

Domestic PP users have been pushing for PP futures to reduce market volatility and strengthen China's pricing power in the international market.

Currently, two plastic products, LLDPE and PVC, are traded on the Dalian exchange.

Recovering from Red Ink

China COSCO Holdings Co. Ltd., the country's largest shipper, announced on January 21 that it was recovering from heavy losses suffered in 2013.

"Although no significant changes were seen in the global shipping industry, COSCO took various measures to return to profitability," said Sun Jiakang, Vice General Manager of COSCO, after getting the results of preliminary calculations on the company's 2013 performance.

The Shanghai-listed company made cutting operational costs a major priority for 2013.

With the release of COSCO's official profit report, the firm will file an application to the Shanghai Stock Exchange for the removal of delisting risk warnings, Sun disclosed.

COSCO lost 9.56 billion yuan ($1.57 billion) in 2012 after a deficit of 10.45 billion yuan ($1.73 billion) for 2011. If the company records another loss in 2013, it risks being delisted from the stock market.


27.48 tln yuan

China's private fixed-asset investment in 2013, up 23.1 percent

12.82 tln yuan

Private fixed-asset investment in the service sector in 2013, up 25.4 percent

5.58 tln yuan

Private fixed-asset investment in west China in 2013, up 26.1 percent

Email us at: yushujun@bjreview.com

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