Going wild as good times roll

If you buy the notion that the stock marke t always reflects what’s expected of the economy six months down the road, you’d be like many other investors who have been scratching their heads trying to make some sense of the surprisingly powerful rally on the mainland stock market in the past few weeks.

Hav i n g aw a k e n e d f r o m the prolonged doldrums late last year, the mainland stock market has since taken off on an upward spiral against the backdrop of an economic down cycle exacerbated by dwindling overseas demand and a property glut in many cities and townships.

The government is pushing relentlessly for economic reform and industrial restructuring to trim the excess fat that’s threatening to ruin the health of the real economy.

Such measures are widely expected to create more pain for the economy in the near term before their intended effects can be felt.

Not even the most optimistic economists on the mainland expect the economy to pick up in the next six months. In fact, slower growth is taken as the “new normal”.

So, what is the stock market bull run telling us?

A more pertinent question many investors on the mainland and in Hong Kong are asking is: How much longer would it last?

Seemingly confused and confounded, some stock analysts in Hong Kong and several senior government officials have called for caution, warning that any imminent price correction could deal a devastating blow to the highly leveraged speculators.

Meanwhile, the mainland stock market has continued to draw copious amounts of fresh investment funds that have pushed share prices to new highs on record turnovers.

An investment guru once said in Hong Kong that the capital market is like a voracious beast feeding on liquidity.

That analogy seems to be most relevant in deciphering the mainland market.

The other liquidity-devouring beast, the learned Wall Street analyst said, is the economy, which, in this particular case, consists of the manufacturing sector and the property market.

The mainland stock market beast is obviously gorging itself on plentiful supply of liquidity, while its rival is too slack to compete.

The mainland central bank has indicated it has no intention of pursuing a Westernstyle quantitative easing program to stimulate economic growth.

But it has been pumping fresh capital into the economy in the past few months. The latest 100 basis-point reduction in the reserves requirement ratio for banks is widely estimated to have released up to 1.2 trillion yuan ($193.7 billion) into the banking system.

Gripped by dwindling demand and over-capacity, the manufacturing sector has been retreating rather than expanding.

The property sector needs capital, but banks are reluc- tant to lend to developers who are hard pressed by over-supply and falling sales, especially in many over-built second-tier cities.

For that reason, it can be assumed that the stock market party is likely to get wilder in coming months, while the central bank keeps refilling the punch bowl. The author is a senior financial editor of China Daily Hong Kong Edition.