China downturn not result of fundamental failure
The downturn and volatility in the Chinese equities market is not symptomatic of a wider downturn with the equities stampede driven by new margin lending measures imposed by the government.
This is reflected by the fact that Chinese bonds and currency markets have remained stable throughout the past week according to global asset manager AllianceBernstein (AB).
AB Chief Investment Officer, Asia-Pacific ex Japan Value Equities Stuart Rae said while the scope and speed of the sell-off has created anxiety but much of it has been centred around the China A shares market, where local currency-priced shares of companies incorporated in mainland China are traded only in mainland equity markets.
Rae said after the introduction by the government of measures to reduce excessive margin lending in the stock market, those same margin leverages exacerbated the correction and resulted in high market volatility.
According to Rae the government has implemented measures to support the market which included allowing around 50 per cent of firms trading on the market to suspend trading of shares which has caused a liquidity crunch in the market for A shares.
"With the balance of margin loans still at a very high level, A-share market volatility may last for some time yet. So, too, will the government's attempts to contain it. This means that the outcome of the current period of uncertainty will depend to a large extent on how the government responds," Rae said.
However
AB Asia-Pacific Fixed Income Director Hayden Briscoe said China's government bond market has performed much like those in mature, developed-country economies and reflected improvements in China's economic fundamentals.
Briscoe said currency markets had also been flat relative to the US dollar during the equities upheaval and that long term government policy was responsible for this result.
AB Global Fixed Income Research Asian Sovereign Strategist Anthony Chan said it was unlikely China would not follow the US, Europe and Japan and engage in quantitative easing.
"We believe China's massive liquidity resources will be sufficient to the task. While this would be disappointing for those keen to see China reform and put itself on a sustainable path of growth, it should at least bring comfort to investors who have difficulty seeing beyond the equity market's gyrations," Chan said.
AUTHOR
Jason Spits
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