Economy

One Ting at a time

Markets reverberate on mixed signals

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He played Ting Hai: Adam Cheng

What Gordon Gecko is to Wall Street, so Ting Hai is to Hong Kong. Over the past two weeks, the city’s newspapers have been full of speculation that repeats of TV series The Greed of Man will prompt a pullback in local stock markets (see WiC 277). Ting Hai was a short-seller and the legend is that the market falls whenever the series is broadcast (or, indeed, whenever the actor who plays Ting appears on TV at all).

Earlier this week, the station, which produced the show admitted it was only rescreening the drama because of the boom in Hong Kong stocks. In the space of 11 trading days between March 27 and April 16, the Hang Seng China Enterprises Index rose almost 24%.

But Chinese regulators may have been paying more heed to a warning delivered to Fong Chin-bok, another character in The Greed of Man. “Human instinct tends towards the greedy and many will go to no end to gain unearned wealth,” Fong’s mentor Yip Tin tells him. “Thus a paradise [the stock market] turns into hell. Countless people become penniless, even losing their lives.”

The CSRC, the stock market regulator, is conscious that one million retail brokerage accounts a week were being opened in March. Working from 2014 data, Bloomberg has estimated that 6% of China’s new investors are probably illiterate, with a further 25% leaving school before the age of 15.

This leaves CSRC bosses with the difficult job of trying to maintain a bull run, but avoiding the kind of bubble that could wipe out novice investors when it inevitably pops.

Meanwhile, their counterparts at the central bank have the tricky task of trying to shrink the shadow banking sector and reduce overall leverage, while pump-priming the economy to keep GDP growth going at around 7% a year.

This delicate balancing act has led to a series of seemingly contradictory policies. The overall aim, nevertheless, is to maintain momentum in the equity markets and the underlying economy.

Last Friday, the CSRC led the way with measures covering umbrella funds and short-selling that seemed designed to have a dampening effect. Umbrella funds are estimated to provide two to three times more leverage than margin trading and the new rules prevent brokerages from establishing new umbrella arrangements, although existing products can remain as long as they were legal in the first place.

The regulator has also increased the number of stocks available for short-selling from 900 to 1,100.

Then on Sunday, the central appeared to be trying to reinvigorate the market with a surprise 100bp cut in the reserve requirement ratio (RRR), which dictates how much money banks need to keep on deposit with the central bank.

As HSBC writes: “The magnitude of the cut – the largest since November 2008 – signals Beijing’s heightened concerns over the growth slowdown and disinflation.”

Analysts say the RRR cut should inject about Rmb1.2 trillion ($193.7 billion) of new liquidity into the system. However, the expansionary move may not be enough to counteract the liquidity effect of the clampdown on local government financing vehicles and shadow banking sector – two of the biggest borrowers in recent years. Instead, the government has turned to the policy banks for a more targeted approach to lending. One upshot is that China Development Bank’s commercialisation is being reversed (see WiC189 for more on how CDB wanted to become a more typical lender). In mid-April, the State Council agreed to a capital injection enabling CDB to provide more low-cost funding for infrastructure projects that fuel growth, and analysts believe its loans may double to Rmb1.5 trillion in 2015.

On Monday, stock markets in Hong Kong and China fell as they absorbed the mixed messages from the CSRC and PBoC. Then they dramatically bounced back on Tuesday.

For the moment, it seems that the market is not taking heed of Yip Tin’s warning. “I have been in the stock market for years and I have never seen a true winner,” the market guru concludes. “A smart person should know that this is a battlefield where no winners will emerge. There is only one way to win: leave the market early.”


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