China faces challenge of disconnect between stock market and real economy
Stock markets have continued their wild ride amid conflicting signals from the authorities. First they announced measures aimed at speculators in a bid to cool the market, then unfroze up to 1.2 trillion yuan (HK$1.5 trillion) for lending by banks. This reflects a dilemma for policymakers. Investors - including a reported eight million first-time punters in the last three months - have poured so much money into mainland markets and into our bourse through the Shanghai-Hong Kong Stock Connect scheme that it has clearly formed a bubble at a time when the economy is slowing. Not only do fundamentals not support the exuberance, but price-earnings ratios of many companies are in extreme dotcom-bubble territory.
Regulators wanted to boost the flow of money to small and medium-sized enterprises, the main drivers of job creation. Indeed, Premier Li Keqiang recently urged more lending to SMEs during visits to two major state-owned banks, the Industrial and Commercial Bank of China and China Development Bank. This raises the question of how much of the fresh liquidity injected by the authorities has been pumped into the real economy, and how much has been simply gambled on the mainland stock markets, which now influence Hong Kong's markets through the stocks through-train scheme. It is not without good reason that mainland markets are referred to as casinos, driven more by speculation than fundamentals.
It may be argued that wealth generated by a buoyant stock market will boost demand and the real economy. The fact remains that this was the intent of three interest-rate cuts since November and two reductions in how much cash banks must keep in reserve, but the effect remains limited. There are reasons other than finance why enterprise is not expanding nor borrowing - structural problems such as a stifling bureaucratic and regulatory environment and operating costs. This illustrates enormous economic challenges facing the government, the answers to which are unlikely to be found in the euphoria of a market disconnect with the real economy.