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Reasoned views deserve place at stock market

2015-01-19 09:56 Global Times Web Editor: Qin Dexing

Investors should be encouraged to weigh opinions of bulls and bears

It's a wild time to be an investor in China's A-share market, and recent volatility levels are only making things more harrowing. With the benchmark index still hovering at high, recent turbulence could feature at local markets for some time to come.

As prices swing wildly, many wonder whether the bull market, which saw local shares jump by upwards of 50 percent in 2014, is running out of steam.

Some Chinese experts insist that the factors which pushed stocks to current heights will persist into 2015. For starters, central authorities are obviously keen to see markets deliver a financial shot in the arm to local businesses struggling against decelerating economic growth. Meanwhile, there are still plenty of retail investors ready to pile in after recent run-ups, potentially driving stocks further upward. Institutional investors are also likely to whip prices even higher through China's expanded margin trading scheme. Such factors, which many credit for recent market ebullience, are unlikely to waver over the coming months according to some bullish observers.

On the opposite side of the coin, more pessimistic analysts say the run-ups are becoming increasingly divorced from economic reality. Deepening economic malaise is weighing on profitability across China's corporate sector, meaning that the liquidity-driven rallies could soon come to a screeching halt.

Some domestic experts suspect that international investment banks, motivated by malicious intentions, are spreading rumors that the rally is about to unwind. Experts accuse foreign institutions of trying to control market expectations in pursuit of their own interests. Some local analysts also say it is pointless for international investment banks to assess China's A-share market with traditional theories and models, past experiences or even basic common sense. Chinese bourses are not like those found in mature overseas markets, some contend, implying that A shares are driven less by profitability and more by policy trends and speculation.

As always, there is truth on either side of the bear-bull spectrum. Obviously though, some domestic pundits have taken an extreme position by condemning international investors. Of course, investment banks have their own interests, as they openly admit in their own research reports and as should be obvious to anyone with a basic understanding of normal market behavior.

In actuality, research teams at many top global investment banks make solid arguments to support their conclusions. Indeed, the risks they've pointed to recently should concern all investors, namely: a further downturn in China's property market, defaults in the shadow banking sector, yuan depreciation and outflows of hot money. In their view, with the Chinese economy in the midst of a major transition, any policy misstep could have dramatic repercussions on the market. An overdose of liquidity, for example, may be interpreted as a sign that efforts to steer the country away from investment-driven growth are not taking hold. Fundamentally, many foreign bears see such man-made attempts to jolt asset prices as unsustainable.

Chinese critics also conveniently overlook the reasons for optimism tipped by foreign investment banks. UBS, for example, estimated in December that about 1.34 trillion yuan ($218.6 billion) in new funds would enter the equity market over the next three months. According to poll results by foreign media, economists with several institutions also expect the People's Bank of China to cut interest rates and lower reserve requirements, resulting in increased credit access and lower lending costs for cash-strapped firms.

The arguments of international investment banks are not without theoretical underpinnings. These institutions also make rational points about factors which could prove favorable to local stocks. Nevertheless, some in China are not swayed because they consider Chinese retail investors (who still account for the bulk of market liquidity and turnover) as fundamentally irrational. If anything, the perpetuation of such views - at the expense of rational skepticism - may only lead to even more irrationality. Chinese investors have long been known for their erratic trading behavior and willingness to speculate. If such habits are to be broken, investors need more information and access to a variety of views.

At a time when Chinese authorities are attempting to promote market-based allocation of resources, well-argued opinions should be encouraged so that people can make informed market decisions. Those who point to risks should not immediately be dismissed as saboteurs or front-runners in an international conspiracy. With their wealth on the line, members of the investing public should hear a multitude of opinions and be encouraged to use their best judgment.

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