China Stocks and the Tapering of U.S. Stimulus
Now China is saying its turn has come as other Asian markets fall on prospects of reduced economic stimulus in the United States. That would mean relative stability for Chinese stocks as the Federal Reserve unwinds five years of quantitative easing measures to stimulate an economy that's been sick for that long.
Round one of U.S. quantitative easing in 2008 and phase two in 2010 lifted Chinese A-shares, along with their peers around emerging Asia.
But A-shares, being state controlled, do not necessarily move up or down in concert with the other emerging Asian markets that are falling as the Fed talks about tapering QE. If investors were unwilling or unable to buy Chinese shares in the first place, they might have put relatively few assets in China following the flood of cheap stuff pumped out by QE.
H-shares (HSCE), Chinese stocks listed in Hong Kong, will lose relatively little with the tapering of QE because the local currency is pegged to the U.S. dollar, notes Lorraine Tan, equity researcher with S&P Capital IQ. The greenback tends to grow when high-yield markets fall. Absent some other source of counter-pressure, currencies elsewhere in Asia will depreciate with the easing of U.S. stimulus.
Chinese authorities are likely to gloat about the immunity of their markets, as independence from foreign forces -- economic as well as political -- always give the nationalistic government something to brag about. Stability of China's markets in a time of global decline or volatility would also support Beijing's policies of restricted market access.
"China's A-share market proved rather resilient to the (Fed) cut's impact with only slight fluctuations thanks to recent support measures and active growth stocks," the official Xinhua News Agency said on Aug. 21, referring to reports that the Fed would tighten its stimulus-linked $85 billion monthly bond-buying program.
"Emerging markets in Asia have responded with sinking stocks to the predicted U.S. stimulus cut, but a 1997-like Asian financial crisis is unlikely and China is expected to remain resilient against the impact," the Xinhua report adds.
According to minutes from a Federal Open Market Committee meeting, Fed officials favor tapering economic stimulus as long as U.S. data improve, signs the world's largest economy may be on the way out of whatever has sickened it since 2008. The Fed will probably "moderate" the pace of securities purchases later this year, according to a UBS research note.