Viewpoints

What's Driving the Chinese Equity Market

05.01.2015

The Chinese stock market has taken off, as the Shanghai Stock Exchange Composite Index returned 214% for the one year period ending April 24, 2015. While the equity market seems to have been fueled by liquidity, the underpinnings are rather weak. Among other easing policies, the People’s Bank of China (PBOC) has made consecutive cuts to the reserve requirement ratio (RRR) on all Chinese banks. In mid-April, the central bank announced another cut to the RRR by 100 basis points, and the market seems to have taken it as a green light for charging higher. Is liquidity going to impact the real economy? It’s difficult to say with a weakening real economy, but liquidity has flown into the stock market. Despite the soaring markets, we believe there has not been much improvement in economic fundamentals. In fact, the fundamentals look rather weak.

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