Mr. ShangkongCan bull or bear markets be more predictable?

China must adjust the economic structure as soon as possible. Failing to do so would result in "a lost decade" for the world's No.2 economy, says Edward Ding, chief economist for China Merchants Securities

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Beijing, the capital city (Photo: George Chen/SCMP)

Published: 4:02pm, 12 Oct 2012Updated: 5:00pm, 30 May 2016

Can we be more precise predicting the next bull or bear market? From a macroeconomic perspective, the answer is yes.

China has experienced roughly three main business cycles, up and down, since 1992, and Edward Ding, chief economist for China Merchants Securities, said in a new research report that there is a definite relationship between business cycles and stock market performance.

Using the Hodrick-Prescott (H-P) filter model, which is popular among many investment bank analysts, Ding noted that when the positive output gap (see dark red line in Figure 1) began to shrink, the country’s economy also started to contract (see Figure 1, in two-stage division) or was already in a recession (four-stage division) and such trends often indicated that a bear market was not far away.

Judging from the right end of the curve (also Figure 1), we currently have a negative output gap of two percentage points, given the 7.6 percent year-on-year GDP growth in the second quarter of 2012, Ding noted.

Based on the H-P model, China’s current economic state is even more critical than during the 1997 Asian financial crisis and the 2008 US subprime crisis, Ding said in the report.