Remember Shanghai 4000?
With all the market turbulence of the past month, little media notice has been given to China’s stock market, which has been unaffected by the turmoil. The WSJ takes up the story again:
China’s market still doesn’t play the central role its counterparts do in more developed economies. But the market is starting to emerge as a closely watched indicator for the Chinese economy, which this year will become the world’s third largest, after the U.S. and Japan. Already once this year, in February, a market swoon in China startled markets elsewhere. Mounting uncertainty about U.S. economic growth makes China’s economy, and its market, more important in investor eyes.
For economists gauging the outlook for China’s markets, one key question is whether weak global markets might translate to softer demand among consumers in the U.S. and elsewhere — and thereby slow China’s exports, which are a major contributor to the economy. About one-fifth of China’s exports go to the U.S., leaving China’s economy “potentially very vulnerable to any substantial future U.S. consumer pullback,” Michael Kurtz, a Hong Kong-based strategist at Bear Stearns, said in a recent note.
Since China’s bull market began in July 2005, it has risen by 3.6 times. That has brought total capitalization of its two exchanges, in Shanghai and Shenzhen, to about $2.8 trillion — about the size of its annual gross domestic product. That isn’t high compared with other countries, but it does suggest any major market setback could cause broader economic fallout than has happened in China in the past. By contrast, the country’s last bear market, in the first half of this decade, had no apparent impact on broader economic growth.
Few consider Chinese stock prices cheap: Shanghai-listed shares trade at an average 55 times last year’s earnings. Yet among China’s retail investors, confidence remains high. In the first half of August, 1.78 million new trading accounts were opened. A week ago, as credit worries were pounding global markets, $7.8 billion was pledged in a day to the launch of a mutual fund offered by China Post & Capital Fund Management Co. Friday, three initial public offerings made their debuts in China, rising an average of more than 300%.
The Shanghai Composite Index did decline for three straight days late last week. It ended the week at 4656.57, about where it was 10 days earlier, holding a gain of 4.1% for the month.
It was only in May that the Shanghai exchange reached 4000. It appeared to many overvalued then. And the succeeding months have witnessed a 1000 point trading range, from a correction in June to its current lofty heights, where stocks trade at 55x earnings. It seems a little surprising that the events of the past month appear entirely absent from the Shanghai market. We’ll have to see what the future holds.