Shanghai rollercoaster

Shanghai rollercoaster

The Shanghai stockmarket fell more than 20% in August. Why? The usual short-term explanations abound, but Michael Pettis at Peking University thinks you should probably ignore them. The reality is that Shanghai is just a casino.

"Why did the market collapse? Forget about fundamentals. As I have argued many times before, China lacks the necessary tools that fundamental investors use (e.g. good macro data, good financial statements, a clear corporate governance framework, a stable regulatory environment, a market discount rate) and so no matter what people say, there are no fundamental investing here. There is only speculation, and the two things above all that drive the markets are those old speculator favorites, changes in underlying liquidity and government signaling."

Having said that, the market fall does reflect growing concern, says Pettis. Economically speaking China, like the U.S., is moving into phase two of the crisis , and the question of what to do once the massive stimulus option is over is probably the thorniest challenge to date. 

The market-side team at Macquarie Shanghai agree: government stimulus (known in many financial circles as "the punch bowl") appears to be tailing off, and that's a concern:

"At least recent China-stock jitters can't be blamed on a bad earnings season. As of today, 96% (by market cap) of Macquarie's HK/China coverage universe has now reported 1H09 interims. The results season has coincided with a 9%, month-long H-share pullback, but the earnings reports (largely positive) don't strike us as the likely culprit. For that, we look to macro policy and fears – likely overdone -- that Beijing may be taking the punchbowl away too fast."

Pettis says once reality begins to bite again, Beijing will have no choice but to top up the bowl:

"My guess is that if the local stock markets do not soon recover their bounce (and they won’t without government help) and, even worse, if we start to see the awful sentiment seep into the real estate sector, Beijing will once again push forcefully for credit and fiscal expansion. In my opinion there is simply no way that domestic consumption – unless it is primed with government giveaways – can make up the slack quickly enough."