Chinese stocks were on a tear Monday, after positive media reports on the healthy state of the People’s Republic’s equity markets.
Via the FT:
The country’s CSI 300 index of Shanghai- and Shenzhen-listed shares jumped 5.7 per cent with trading volumes more than double their recent average. More than 280 of the CSI 300’s shares finished in positive territory, while many banks and brokerage firms rose by the daily maximum of 10 per cent. The financials sector as a whole topped the leaderboard, up 9 per cent.
Most notable was an article in the state-owned Shanghai Securities News, which lauded the capital markets and described the, err, “clattering of the hoofs” as “a beautiful call from the post-epidemic era”. (Thanks Google Translate.)
Western investors may chuckle at such shameless attempts to lift equity prices, particularly when you consider that the Chinese state likes to dabble in the market at opportune moments via state-owned insurers. But really is it that different to what we’ve seen from policymakers of late on both sides of the Atlantic?
In the US, of course, institutional support is far more implicit. The Federal Reserve, although lacking the exact mechanical means to lift equity prices, has done so via signalling to the market it will react if things can get dicey.
It’s a practice it has deployed during the Greenspan era, through the Bernanke and Yellen years until the present day.
Who can forget Grandmaster Jay’s speech in Atlanta in early January 2019, which promised a slower rate of interest rate rises after a turbulent fourth quarter in both equity and debt markets. Or, in more recent memory, its wide purchases of bond-focused exchange traded funds to support corporate America during the pandemic.
Then of course, there’s the positive reporting of day-trader favourite CNBC and the overwhelming number of “buy” versus “sell” recommendations on Wall Street, even when a company looks, at the very least, questionable. Presidents too, often voice their support for the stock market. Barack Obama, for instance, timed the market bottom in March 2009 with his line that stocks were now at the level of a “potentially good deal”. Then there’s Trump’s assorted tweets on the performance of the market. When you look for it, institutional support for stock prices are everywhere.
On the continent, the same arguments apply. Although Europe perhaps lacks the financial cheerleaders – whether it be Jim Cramer, Louis Rukeyser or Peter Lynch – of the US.
And that’s not necessarily a bad thing! Depressed equity markets are bad news for a country. They can affect everything from foreign direct investment flows to how much cash lands in a pensioner’s pocket every month. Not to mention the explicit costs of starting a new business.
And in general, buying stocks has been a pretty good trade for, what, the last 40 years? So it can’t be argued the advice is mistaken either. Even if the idea of “stocks for the long run” is based on data limited to the past century.
The problem, as China – or indeed Trump – may find out, is if you begin to depend on stocks as a leading indicator of how well your country is doing there’s a chance that you’ll end up ignoring other indicators – economic or otherwise – that matter just as much, if not more, to your citizens.
It’s no good boasting to your voters that the Dow or the CSI is rocketing, if their life expectancy is coming down.