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 China’s Stimulus Package = Return of the Bubble?

11/10/2008

After coming down 70% from the peak, the average PE of Chinese stocks comes down to around 12. It looks like a good investment for a country with GDP growth around 9%. However, there was no sign of life in the Chinese stock market until now. The government is changing the tight credit policy to loose credit policy. With the $586 billions stimulus package unveiled yesterday, will the bubble return?

Let’s take a closer look.

70% Discounted

  • The Shanghai Composite Index reached peak at 5,523 in Jan. 08. Then it came all the way down to 1,663 in Oct. 08. The 70% discount brings the PE of those Chinese companies down to a around 12, a more reasonable level. However, whether a PE of 12 means a good investment or not depends on the future economy of the country.

The Economy in China

  • As the global recession hitting all the developed countries, the manufactory of the world - China starts feeling the heat. After lots of orders being canceled or delayed, many small factories go bankruptcy or are very close to do so.
  • Although China still has 9.9% growth in the GDP, keeping it may be a problem.
  • It is commonly believed that export accounts 40% of the GDP although some studys show it is only 10%.
  • The Chinese government’s GDP prediction is around 8~9% in 2009.

Change of Policy

  • The economy was so hot in China before the bubble bursted. The stock and housing market were sky high. The byproduct of that is inflation. The CPI jumped to the 8% level in Mar. 08.
  • The Chinese government applied a bunch of measures to control the overheated economy.
  • No matter what percentage export accounts the GDP, the overheated economy is not there anymore. A US$ 586 billions stimulus package is on the way.

   

Change of Policy

  • The economy was so hot in China before the bubble burst. The stock and housing market were sky high. The byproduct of that is inflation. The CPI jumped to the 8% level in Mar. 08.
  • The Chinese government applied a bunch of measures to control the overheated economy.
  • No matter what percentage export accounts the GDP, the overheated economy is not there anymore.
  • Policies have been changed to stimulate the economy. Interest rate have been cut 3 times in Sep. and Oct. 2008. A set of new policyies such as cutting/delaying tax also introduced to encourage investment and easy the credit crisis.
  • Last but not least, a US$ 586 billions stimulus package is on the way.

 

Confidence

  • The confidence of Chinese investors changed from extreme over confidence to extreme under confidence. Every time the index came to a support level, investors expected the government will do something to cheer the market and rushed in. However, as the stock index broke those  support levels one by one, the expected government support never came. Investors got hit wave by wave.
  • Before the US$ 586 billions stimulus package, the market showed no response to those stimulus measures including the rate cuts.
  • The billion dollars stimulus package cheers up the Shanghai Composite Index by 7%.

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