The monetary expansion policy of the People’s Bank of China fueled the Shanghai, Shenzhen, and ChiNext indices of 95%, 198%, and 383%, respectively, since January 2013. Chinese stock-market capitalization grew from 44% of GDP at the end 2012 to 94% of GDP earlier this month[1], but at the same time the Chinese GDP growth, equal to 7,4%, has slightly slowed at the lowest level since the 1990 and the average ratio price to earnings is 26.

It seems clear that there are enough evidences that prove the presence of financial factors that are threatening the economical rebalance of Chinese economy: from export oriented economy to consumptions. This is the issue. At the beginning of financial crisis, the Chinese political establishment chose to fuel the economy by increasing the public spending and making easier to borrow money.

Therefore, the private debt raised from 100% in 2002 to 200% in 2014[2] and the PBOC tried to stop it by raising the refinancing interest rate until started the first bankruptcies and the slowdown of Chinese economy. The PBOC knows that the economy needs a monetary stimulus but the more the money supply increase the more grows the probability to create a financial bubble.

In order to minimize the possible negative effects of a hard slowdown, the Government is trying to boost the economy by cutting the refinancing interest rate (from 6.5% to 5.0%), deregulating the financial markets (e.g. exchange rate fluctuating) and privatizing most of public companies. The issue is that the more the money supply increase the more the financial bubble grow.

It is sure that the Government will have to face the dichotomy between autocracy and capitalist markets, but how it will face the issue will determine the feature of the Chinese economy slowdown[3]. Anybody should not underestimate the huge challenge to change the Chinese economy into a fully capitalist system, as the MSCI index committee decision to do not list the Shenzhen A shares (for some regulatory framework) show.

Last but not least, the main market mover it will be the dual listing between Shenzhen and Hong Kong stock exchange.

ChiNext

PBOC Interest Rate

By:

244a02b

Roberto Vacca, Master Student

[1] Cf. “Channeling China’s Animal Spirits”, by Xiao Geng and Andrew Sheng 26/05/2015, available on http://www.project-syndicate.org/commentary/china-economic-growth-by-andrew-sheng-and-geng-xiao-2015-05
[2] See “China’s debt-to-GDP level”, by S.R. 16/07/2014, available on http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level
[3] See “Nouriel Roubini: China Slowdown May Be Sharp”, by Bloomberg 04/02/2015, available on http://www.bloomberg.com/news/videos/2015-02-04/china-slowdown-may-be-sharp-nouriel-roubini
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s