A number of foreign fund managers have begun poking around the market, impressed by the valuations. Even after this weeks rally, stocks were trading at 14 times 2008 earningsnot a steal, but still far cheaper than the 40 times earnings at which they traded at their 2007 peak.
The catalyst for this weeks rally was a pervasive rumour that often crops up when sentiment becomes too jaded: government intervention, either to prop up the market or the economy.
One of the cheerleaders, Frank Gong, JPMorgans chief economist in Asia, said Chinas top officials were carefully considering an economic-stimulus package of 200-400 billion yuan ($29 billion-58 billion), or about 1-1.5% of GDP. There was also talk of repatriating some Chinese money that had been tied up in American dollar assets, including Fannie Mae and Freddie Mac, the troubled mortgage agencies; of reinstating rebates for exporters; and of rolling back appreciation of the yuan. Among the stocks that rose strongly were Baosteel, China Railway, and some beleaguered property stocks. All are potential beneficiaries of strong growth.
But for all the excitement, there were plenty who wanted to throw cold water on the partyindeed, the market fell back on August 21st. Those included people bullish on Chinas economic outlook, who reason that with reported GDP still growing above 10% and inflation high, the government has no intention of intervening in the economy. Indeed, they argue, such stimulus could be inflationary.
Meanwhile, those more pessimistic on Chinas prospects said such measures would do no good anyway. Trade is the main vulnerability. They note that container traffic to Europe has stalled after double-digit growth earlier this year, and that it has been contracting to America since 2007. The outlook for trade with Japan is none too bright, either.
Meanwhile, estimates for the growth of company earnings, though still high, are coming down, too. In January profits were expected to rise by 22% this year; now growth looks more like 14% and dropping, says Markus Rosgen, Asia strategist for Citibank. The only silver lining to all this, he adds wryly, is that a bottom, even if not in sight yet, is a lot closer than it was.
The Economist Newspaper Limited 2008