No news is bad news for stock market

10:20, July 06, 2010      

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When it comes to China's stock market, no news is bad news.

Last week, the bears further tightened their grip on the country's A-share market as the benchmark Shanghai Composite Index suffered another steep drop to fall below the psychologically important level of 2,400 points after declining more than 25 percent this year.

Market watchers are trying hard to decipher the plunge, puzzled by the fact that the stock market suffered the worst fall in a country that has had the strongest recovery from the global financial turmoil.

Analysts attributed the sell-off in the A-share market to factors such as investors' growing concern about a faster-than-expected slowdown of the domestic economy, uncertainties over Beijing's policy stance and the possibility of a double-dip recession globally.

But none of these factors are news. Economists have been talking about such risks for months. Premier Wen Jiabao has also repeatedly warned of the potential problems in the country's economy, using phrases such as "an increased dilemma in policy adjustment" and "extremely complicated economic environment".

One would think that, in an effective and well-functioning market, these concerns should have already been priced in. And the market shouldn't be too surprised at declines in major economic indicators such as the Purchasing Managers' Index as it should prove an effective correction to offset the risk of the economy overheating.

Then where does the mounting pessimism come from? Perhaps the biggest problem is the lack of news and the mixed signals sent by different economic indicators. Investors are torn by the economic indicators that show that the economy appears to be running hot and cold at the same time.

Risks of an overheating property market, a surge in exports and rising inflation remain the top concerns while the country's manufacturing sector has shown signs of significant cooling. These have left the market in an extremely unsettled and uneasy state of mind and any subtle shift could trigger a devastating sell-off as investors would rather sell and run instead of waiting patiently until the economic prospects brighten.

Policymakers in Beijing are also having a hard time. They are walking a tightrope between the overheating and overcooling of the country's economy, struggling to achieve a balance and trying to avoid either of these two sour situations.

The recent plunge is perhaps the market sending a signal that growth would trend down even further and the economy will see a worse-than-expected deterioration if the current policy tightening remains in place for too long.

Now everyone is waiting for the second-quarter GDP data which is due to be released on July 15. Some economists have lowered the growth forecast to 10 percent from the first quarter's 11.9 percent year-on-year growth. It is widely expected that the slowing growth should be enough to convince Beijing to loosen its policy stance.

It is not that the stock market overreacted to bad news in good times. What the market is saying is that if Beijing's macroeconomic policy proves to be not working, the good times might be over and the China story of a solid recovery is going to end with a hard landing.

Source:China Daily


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