New year calls

‘Less is more’, he says

Making predictions on China’s volatile stock market can be a thankless endeavour. This time last year the Shanghai Composite Index (SHCOMP) had rebounded 30% in three months to return to the 3,000-point level (see WiC264). Domestic brokerages were bullish about the prospects for the A-share market in 2015, especially China Merchants Securities and Guotai Junan, which were predicting that the index would climb above 10,000 (its all-time high was 6,124 in October 2007).

But the Chinese Academy of Social Sciences (CASS) looks to have made one of the best calls (for the second year in a row). Having correctly predicted a surge in 2014, the State Council’s think tank forecast that stocks could reach 4,000 points and possibly even hit 5,000 this year.

The SHCOMP indeed reached 5,000 in June but only stayed there for a few sessions. After reaching a high for the year of 5,178 on June 12, the index plummeted nearly 30% in 14 trading days (see WiC288).

“The bull market came quickly but went even quicker,” Shanghai Securities News opined at the time.

So what about 2016? In the fourth quarter, Chinese stocks have traded largely in a range around the 3,500-level. Guotai Junan now sees the SHCOMP trading between 3,200 to 4,500 next year (a somewhat more conservative guess than its forecast last year). This kind of range looks to have become the market consensus among stock analysts. “Most domestic brokerages go into 2016 with a fairly upbeat outlook. But the mood is much more cautious compared to where it was last December,” Shenzhen Economic Daily notes.

This year’s rollercoaster performance in the Chinese markets has been chastening for investors, especially those who came late to the party and bought into the boom just before the crash. And adding to the mood of investor caution as 2015 ends is a more pessimistic outlook on the Chinese economy.

HSBC has generally taken one of the more optimistic positions on China’s growth prospects in 2015 but this week the bank’s chief China economist Qu Hongbin sharply revised his GDP forecast for 2016 to 6.7% growth from 7.2%.

“We expect that the slowdown in demand will be faster than the slowdown in the supply potential of the economy, resulting in a persistent negative output gap,” he told investors.

According to CSSN, a news website run by CASS, the afore-mentioned think tank, the central government is acutely aware of the risks of an economic slowdown. As a result more stimulus measures are likely to be announced following the Central Economic Work Conference later this month. In fact, speculation has been rife that the leadership in Beijing will focus on measures to cheer property investors and homeowners, such as making mortgage interest payments tax deductible.

CSSN also notes that Chinese Premier Li Keqiang has penned an article in The Economist’s ‘The World in 2016’ publication to outline “China’s economic blueprint” for the year ahead.

“Despite moderation in growth, the Chinese economy is moving in the desired direction of stronger domestic demand and innovation. One by-product is a fall in the relevance of indicators such as power consumption, rail-cargo volume and new bank credit in gauging economic performance. Yet this transition from ‘bigger is better’ to ‘less is more’ is a good thing,” Li writes.

The Financial Times agrees that Li and his colleagues are trying to “shift from an economy led by investment and exports to one driven by consumer demand”. But the newspaper adds that “with its room for manoeuvre reduced by weak global demand and skittish investors, Beijing will need luck as well as judgement to continue the process”.

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