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Bad news is good news for China's share market

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Bad news is good news for China's share market.

Larry Williams:
China, interesting isn't it? It's slowing, shares are surging — what are you seeing there?

Frank Jasper:
This is China entering the post GFC world, which turns out bad news is good news for share market investors. China is looking a lot more like the rest of the world now; disinflationary, slower growth, and they are loosening monetary policy. And like it has in the rest of the world, it's been good news for the share market.

We all know that growth in China is slowing, the building boom they had post the GFC really hasn't worked, it hasn't boosted long term growth, it's been overbuilding ghost cities and an indebted banking system.

The Chinese government is responding and trying to fix it by cutting interest rates and in quite an interesting move has reformed securities laws. The combination of those two things has put a rocket under the share market.

Larry Williams:
Yes, a 50% move in the market over the past three months is pretty impressive.

Frank Jasper:
Yes it's impressive, although in some ways it feels a lot like a government led casino than a stock market. The government really does want higher share prices. A market rally lifts and fits well with the economic strategy of the country, they're trying to improve business performance and give the share market a greater role in the economy. It helps that those companies can raise capital at better prices, but it also makes the Government more popular which is an important dynamic. The rally gives investors a place to put their savings at a time when the property market is really weak and banks are offering poor returns.

The government has changed the rules of the game. They have relaxed restrictions that controlled capital movements between China and Hong Kong and they've made it a lot easier for individual investors to trade. And that's meant that the markets are off to the races, millions of people are opening up share accounts. In fact, there has been as many share accounts opened in China in the last three months as there were in 2012 and 2013 combined.

Larry Williams:
Will this end up affecting New Zealand?

Frank Jasper:
I guess in the broadest sense when you take into account that China is doing this, that the rest of the world is doing the same dynamic as well, low interest rates and surging share markets, it's beginning to affect us here.

Interest rates around the world are at low levels. So low in fact that there are a number of mortgage holders in places like Europe, that are actually getting to have their mortgage there — it's a bizarre thing.

New Zealand interest rates in comparison to the rest of the world are actually pretty high relatively to those very very low rates. What does that mean? People want to put their money here, it means a higher currency — get a high currency, that's not so good for our export sector. And if the global economy is weak, a combination of a high currency and a weak global economy is not great for our exporters, so maybe we start to import some of that poor economic condition to our country.

Larry Williams:
When will this low interest rate, surging share market environment end?

Frank Jasper:
It does seem that this low growth, low interest rate world is here to stay for a while. But it is a really unprecedented environment and I am not sure if anyone really has a clear view of the end game plays out.

For now though those low rates are forcing investors into the share market, forcing people to buy riskier assets, to try and get some return on their money. While that may pay off in the short term, my temptation at least would be to lean against that a little and potentially be a little more cautious.

 

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