Mohan Xu (et al.) from the Guanghua School of Management have tackled a paradox in China that’s long vexed (this one included!) investors. How come when China’s government steps on the stimulatory-gas, stock market investors don’t soon thereafter get rewarded?
It’s been observed in developed markets fiscal pump priming not only jollies an economy along but also leads to higher equity valuations; but this has not been the observed case in China. Why not?
The researchers start by constructing an index of stimulatory intent by parsing official rhetoric to create a stimulus heads-up indicator.
From this it become clear what happens following a stimulatory event: stock prices decline, fixed-asset investment rises and household consumption decreases. Moreover, the currency tends to appreciate whilst private sector and sovereign bond yields rise.
Rising credit costs and lower household consumption then feed back into stock prices, not in a good way. It seems, net-net, the government crowds-out investment which is not what we observe in the economies of Western peers (where governments have a less commanding impact on their economies?).
The recent decision by planners to forego (so far and to date) stimulus in light of China’s poor Q2 GDP out-turn can therefore be read now in a more positive light.
You can access the paper in full via the following link Fiscal Communication and Asset Prices in China.
Happy Sunday.