What caused the rise in the Chinese stock market?
- By Jiang Wei
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E-mail China.org.cn, December 11, 2014
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The stock market minefield [By Jin Yan/CFP] |
In the past two weeks, China's stock market, long the subject of neglect, became a public focus, indicating the likely arrival of a bull market period. From Nov. 24 to Dec.5, 2014, the Shanghai and Shenzhen composite indexes rose by 18.13 percent and 6.97 percent respectively. At the same time, the small and medium enterprise board and the growth enterprise market also increased. Financial, mining and real estate industries became favorites in particular. In just one week, the transaction volume of the Shanghai and Shenzhen stock markets surpassed 4 trillion yuan. Daily transaction volumes exceeded 1trillion yuan, setting a historical record.
Five months ago, there was less participation in the stock market, just like in the past two years. Does the sudden change indicate that the real economy is turning for the better or just experiencing another bubble? So who was behind the pick-up in the Chinese stock market?
The biggest power that motivated the rise was the asymmetrical interest cut by the central bank on Nov. 21, 2014. The market is expecting China to continue its interest cut policy in the first half of next year. And there is a possibility of continuously lowering interest rates. The interest cut this time is really what the financial market has been anticipating, and its leading role in the stock market is within expectations. What exceeded expectations is that the market reaction has been so fierce. There is no problem with the rise in the stock market due to the interest cut. The question is: Is the rise due to an increased macro-economic expectation induced by the interest cut or is it mainly due to speculation? The answer determines the quality of this bull market. To make a judgment, two aspects should be considered: the capital source in stock market and the fundamentals of economic development.
Where has the huge amount of capital come from to support the bull market? According to the China Securities Regulatory Commission (CSRC), from Nov.24 to Dec.4, the net sales volume of general legal-person institutions was 125.2 billion yuan, the net purchases of specialized organizations of various kinds totaled 30.9 billion yuan while the net purchases of natural-person investors totaled 65.9 billion yuan.
In this round of the market, individual investors, especially those who hold A shares with a market value of less than 100,000 yuan made more net purchases. Small and medium investors, especially those who have newly entered the market, contributed greatly to the situation. While institutional investors have been relatively restrained, individual investors, who are more speculative, crammed into the market after years of stagnancy. Information from different stock exchanges shows that individual investors began to swarm in after A shares showing signs of "making money." This basic pattern indicates that the investors in this round do not care about the basic performance of companies. Instead, they are just chasing short-term speculative earnings. The Chinese stock market should beware of the great fluctuation risk caused by changes in investors' sentiments.
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