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Alpha, Beta and China

 3 min read / 

The recent market turmoil has seen China’s A-share market take unprecedented drops and correction phenomena. There are a few questions surrounding the incident. Will the Chinese stock market continue to rely on government assistance and is that the way out? How will this interventionist approach affect the development of Chinese investors and will they grow more sophisticated? International sentiment has built up fear when facing the Chinese market. Will Chinese investors realize that they have been mistaking beta for alpha in terms of fixed income investment strategies, as Forbes columnist and writer Junheng Li has once mentioned?

20150731 Fast ShComp Monthly Falls(1)

Xiaojun Zhang, spokesperson of the China Securities Regulatory Commission, affirms on 31st July that the suspension of IPO’s in China is a short-term measure directed at the “unusual fluctuations” in the markets recently. Government-backed organisations such as CITIC Group have been continuously buying up stocks in bulk for three trading days. The group enacted spending of around RMB 12.30 billion Yuan, while others such as the Beijing Financial Street Investment Group also bought up over RMB 10 billion Yuan worth of stocks. This is projecting a vivid image of the government trying hard to bolster confidence in the Chinese stock market as well as international investors and parties.  Additionally, the government is also following up by condemning “malicious” short-selling, targeted at “spoofers”, investors who manipulate the market by simultaneously placing and cancelling orders to benefit from the price movements.

China is adapting to a new ‘normal’ in terms of economic growth. The Politburo Standing Committee conducted a meeting on 30th July, reiterating the vision of crafting a moderately prosperous society.  The Chinese government realises the need to implement proactive measures to turn the economic system into a sustainable one. It recognises the urgency to enact reforms to maintain stability in policies regarding the Yuan and widen the bracket of private capital. The month long struggle included the government applying tools like suspending trading on the A-share market and preventing share-selling of major shareholders. This has paid off to stabilise the market thus far. The stock market is still very much government-centric, and it’s unlikely that the government would allow the market to be governed by the invisible hand in the near future.

How do Chinese investors factor in external economic movements such as the US Fed maintaining the policy interest rate at zero? We see that the US has returned to a level of 2.3% growth by the second quarter of 2015. The FOMC issued a press release on 29th June stating that the Committee may raise the policy interest rate when it “sees some further improvement in the labour market” and believes that

“inflation will move back to its 2 percent objective over the medium term”

Asian markets generally reacted calmly to the new GDP data, and there was not much notable movements in the Chinese market. Stephen Roach has discussed the development of the political economy of US-China relations, and the economic state of “codependency”. How will this relationship evolve in terms of financial markets, when the maturity level of the markets are vastly different in the two countries?

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