China's economy can kick the stock market blues
BEIJING (Reuters) - Companies and investment banks are keeping their deep faith in China, viewing a recent plunge in the country's stock market as a sideshow and its economic recovery as the real and more important story.
The benchmark Shanghai Composite Index is down 20 percent from its 2009 peak last month even after a slight rebound this week, sowing doubt in some minds about the solidity of the world's third-largest economy.
But the Chinese stock market is notoriously volatile.
Just as its highs seem to defy reasonable valuations, so has its sell-off in recent weeks borne little resemblance to the robust recovery in the country's factories, shopping malls and construction sites, speakers said at this week's Reuters China Investment Summit.
"People must be pessimistic for the market to have fallen so much in one month," said Chen Dongqi, vice-head of the macro-economic institute under the National Development and Reform Commission (NDRC). "But this should not change the trend of the economic recovery."
The government is committed to the "appropriately loose" monetary stance it adopted at the outbreak of the global financial crisis and will not make knee-jerk policy decisions in response to market movements, Chen said.
The trigger for the sell-off of Chinese shares was concern that the government had already begun an undeclared monetary tightening by leaning on banks to abruptly slow new lending.
Chinese banks lent 356 billion yuan ($52 billion) in July and are expected to have made even fewer loans in August, down from a monthly average of 1.23 trillion yuan ($180 billion) in the first half.
Yang Zaiping, executive vice president of the China Banking Association, said the market had failed to appreciate the lending slowdown for what it really was: an attempt to ensure that bank credit goes where it is most needed.
"We have to be more choosy in our lending," he said.
Loans should be targeted toward environmental and high-tech projects and consumption-oriented businesses, and steered away from sectors with over-capacity, he said.
Banks unleashed the record flood of loans at the start of the year to match the government's front-loaded 4 trillion yuan stimulus plan, the crux of Beijing's efforts to deliver 8 percent economic growth this year -- a target that most analysts think is now well within its grasp.
Chinese banks typically issue the bulk of their loans in the first half of the year, leaving companies to draw on the credit over the subsequent months -- a pattern that looks set to be replicated this year, albeit in slightly more extreme form.
"It will not affect economic growth," Yang said. "There are a lot of irrational things in the stock market, like a herd effect."
Despite the recent volatility, valuations are sufficiently stable and liquidity is ample enough to ensure a steady stream of Chinese share issues for the time being, said Philip Partnow, deputy head of UBS's investment banking department in China.
"It will be a very active third quarter and we hope that will continue into the fourth quarter," Partnow said.
"Now, exactly how long does that window stay open? That is very hard to tell. We are hopeful, we are optimistic, but that is anybody's guess."
Before the recent sell-off, China's domestic A-share market was up 109 percent from its trough in November, a rally that had outpaced the economy's rebound from a virtual stall late last year to 7.9 percent annual growth in the second quarter.
"It is very healthy to have a pull-back after a very significant run-up in a very short period of time," said Brian Gu, Greater China M&A head at J.P. Morgan.
"The A-share market is obviously important for people to get a sense of the whole regulatory environment in China and also the sentiment around Chinese shareholders," he said. "But as it relates to M&A volume, I don't see a clear correlation."
After five years of steady growth in advisory on Chinese mergers and acquisitions, Gu was looking for more of the same.
A bigger economic worry is whether contagion from the stock market will spread to the property sector, which has been an engine of Chinese growth.
But just as quickly as they tamped down on bank loans, policymakers can loosen credit again if real estate slumps, said Gao Shanwen, chief economist at Essence Securities.
"The rebound of property investment is key to the quality, extent and sustainability of the economic recovery. We hold a positive view on the outlook," he said.
(Additional reporting by Jason Subler, Zhou Xin, Langi Chiang and Michael Wei in Beijing, and Moxy Ying in Hong Kong; Editing by Alan Wheatley and Ken Wills)
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