When a market gets on a roll, nothing seems to stop it. We have just learnt that China’s exports fell by an alarming 15% last month, while its imports fell by the biggest amount since the financial crash of 2008 and 2009. And the Shanghai index? Well, you might expect it to be down at least a little on news like that.
Instead, the benchmark for Chinese stocks was up another couple of percentage points on Monday, taking it to yet another all-time high. Like any great bull run, it doesn’t matter much any more whether the news is good or bad — equities just keep powering upwards.
In this country, we might think it is a cause for modest celebration that the FTSE has finally limped passed 7,000, a mere 15 years after it last got close to that level. But the real stock market boom is in China. The Shanghai Composite Index has doubled over the past 12 months. It has risen from 3,000 to 4,000 since February.
After lagging the rest of the world for years, China’s equity markets are now soaring. We have already got used to China dominating much of the world’s manufacturing. Now we may be about to see it dominate the financial markets as well. That will have a huge impact on every financial centre, and investor. Indeed, the Shanghai Index is likely to replace the Dow as the key driver of global sentiment. New names are going to replace the traditional megabanks, and the equity markets will be dominated by Chinese volatility — and Chinese politics.
The achingly slow progress of the FTSE, the tepid recovery of France’s CAC and Germany’s DAX, and the fitful rise of the S&P 500 are dwarfed by what is happening on the Shanghai market right now. For years, despite the explosive growth of the Chinese economy, clocking in with 7pc or 8pc annual growth every year, the markets barely moved. For much of that time, an equity investment in the country would have gone nowhere. Now, the markets are playing catch-up – and doing so with rocket boosters on.
The Shanghai Composite Index is already up 10pc this month, and could be set to go a lot higher. Companies such as PetroChina are rapidly racing up the table of the world’s most valuable businesses. It was already the sixth-most valuable company globally by the fourth quarter of 2014, while the Industrial and Commercial Bank of China was in 10th place. At this rate, both will soon be challenging Apple for the top slot.
Of course, plenty of people will dismiss that as just another bubble. Some of the statistics are certainly pretty scary. Deutsche Bank points out that there are school uniform and ketchup manufacturers trading on 300-times earnings. China’s technology stocks are trading at twice the levels of American ones at the peak of the dotcom boom. Almost one in five stocks is on a PE ratio of more than 100. That is probably crazy. The Chinese are inveterate gamblers, who seem to think the stock market should basically be a casino, so it would hardly be surprising if the mania for equities got out of control. Parts of the market may already be there.
That said, so far it may simply be that the local equity markets are just catching up with the explosive growth of its economy, much like the Japanese stock market in the 1970s and 1980s.
Whether it is a bubble or not, China is such a huge economy that the rise of its equity index — and the vast sums of money that will create — will change the markets globally, much as the rise of the Tokyo index did 30 years ago. And there are three ways in which the impact will be most obvious.
Firstly, get ready for the Shanghai index to become the global driver. For generations, investors have grown used to the New York markets setting the global mood. If the Dow or S&P 500 rises, markets everywhere rise. When they crashed, the rest of the markets around the world crashed as well. It was the biggest equity market in the world, trading the stocks of the world’s biggest companies, and when American investors were bullish so was everyone else.
That is inevitably going to change, and the Shanghai Composite is going to replace the Dow. It will be where the biggest companies are traded, and there will be so much money cascading out of its trading floors that the flow of cash will overwhelm other bourses around the world. From 2015 onwards, if you get up in the morning and check how Shanghai traded overnight, you will already know pretty much everything you need to about the health or otherwise of the markets around the world.
Next, Chinese financial firms are going to dominate the capital markets. Most people are probably not even aware of this yet, but more than half the top 20 investment banks and brokers measured by market capitalisation now come from China. Citic Securities and Shenwan Hongyuan are the top two, in case you were wondering, and you need to get used to them. They’ll soon be as familiar as Goldman Sachs and Morgan Stanley, and so will their rivals. When the Tokyo markets soared in the 1970s and 1980s, suddenly the giants of Japanese finance started to dominate the markets and Japanese investors were buying up assets around the world. Don’t be surprised if the Chinese bankers and brokers, rich with cash from the equity boom, start doing the same thing.
Finally, and more worryingly, the markets will become a lot more volatile, and a lot more politically directed. When the global markets were dominated by the Americans and the Japanese, and a long time ago the British, there was at least a degree of stability. There were bull and bear markets, of course, and plenty of crashes, but there were also long-term investors. But Shanghai is a feverishly speculative market with wild mood swings and it is dominated by small investors, trading on margin – that is, with money you don’t have. More than 10m personal stock accounts have been opened in China since December alone, more than the entire population of London. Do many of them really understand the market?
Worse, the market is actively managed by the state. If you want to know what is going to happen, you will need to start understanding the internal machinations of the Chinese Communist Party – or at least follow a broker who does.
You may think of yourself as a cautious investor, restricted to a few blue-chip names on the FTSE. But from now on, if you have any money in equities, one way or another you are going to be playing the Shanghai market because it will dominate everything. As they say in China, it will make for interesting times.
- China’s Xi Jinping comes up with a new political doctrine, the ‘Four Comprehensives’ – a strategic blueprint for China’s future (chinadailymail.com)
- Mega default on January 31 could devastate China’s banking system (chinadailymail.com)
- China stock market crash; biggest one-day drop since 2008 (chinadailymail.com)
- China complains that American education is undermining Communist ideology amongst Chinese students (chinadailymail.com)
- China’s dilemma: How to discipline 90 million people (chinadailymail.com)
- Souring Loans Weigh on China’s Big Four Banks (theepochtimes.com)
- Banks in China feel the pinch of economic slowdown (wantchinatimes.com)
- Slowing Chinese Economy Hits Profits of Two Big State Banks (wsj.com)
- Economy Hits China Banks’ Profits (wsj.com)
- Three ways the rise of China’s stock market will change the world – The Telegraph (telegraph.co.uk)