• 2024-06-29
• News

"Surge in A-Shares, Plunge in Japan, S. Korea"

September 24th marked the beginning of the current rebound, and by the close on September 30th, the Shanghai Composite Index, Shenzhen Component Index, and ChiNext Index had all risen. The A-share market has transformed from being shunned by everyone to becoming the most attractive asset in the global financial market. This all started with the Federal Reserve's interest rate cut.

On September 19th, Federal Reserve Chairman Jerome Powell announced a 50 basis point reduction in the U.S. federal funds rate. Although multiple economies, including the Eurozone, had already begun to lower interest rates, it was the Federal Reserve, known as the "global central bank," that was the main player in the "money printing" drama. Only when it took the stage did the show officially begin.

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Sure enough, not long after the narrowing of the interest rate differential between China and the U.S., our side started to take action.

Measures such as lowering reserve requirements, cutting interest rates, reducing the down payment ratio for second homes, increasing financing for real estate companies, and creating two new financial instruments to add leverage for institutional investors and major shareholders were implemented. Most of these measures fall under monetary policy, and the essence of monetary policy is to "print money" or "withdraw money." It is clear that at present, except for a very few economies, central banks around the world, including ours, are "printing money."

This led to the major counterattack in A-shares from September 24th to the present. The combination of monetary policy and the relaxation of real estate market restrictions exceeded expectations, leading the market to believe that more money will flood in the future, and the country is determined to raise the prices of RMB-denominated assets. With enthusiasm and expectations in place, existing funds from fixed deposits, money market funds, bond funds, and other sources "rushed" into the stock market. Before the central bank's "money" was even distributed, A-shares were already "flooded like a breached dyke."

This is the essence of the pre-holiday surge, unrelated to the economic fundamentals, and purely driven by money and sentiment.

Of course, under the Federal Reserve's interest rate cut and "money printing," we have indeed done well, or the timing of policy announcements was very well chosen, attracting some of the "money" that might have otherwise flowed to other markets.

The most typical example is the Japanese stock market. Also on September 30th, the Nikkei index plummeted by 4.8%; the South Korean Composite Index also fell by more than 1.6%.

Why did the Japanese stock market fall so sharply? It is related to the country's new prime minister. Shigeo Ishihara has been confirmed as the next prime minister of Japan, and he is a staunch advocate of raising interest rates. That's right, he is an advocate of raising interest rates, not lowering them.

With Shigeo Ishihara taking office, the probability of Japan raising interest rates in December has significantly increased. Note that Japan has already raised interest rates twice this year, bringing the negative interest rate to the current 0.25%. If it raises interest rates by another 25 basis points, the policy rate at the end of the year will be 0.5%.Do not underestimate the 0.5% policy interest rate. While it may be considered low in other countries, it is not the same in Japan. The country's policy interest rate has long been negative, attracting a large number of arbitrageurs who borrow yen at low interest rates and then convert them into dollars to buy U.S. bonds and stocks. Even the Japanese themselves engage in this practice, with "Mrs. Watanabe" being a financial arbitrageur.

However, when Japan begins to raise interest rates, narrowing the interest rate differential, a large amount of arbitrage funds withdraw from around the world and convert back to yen to flow back to Japan. Capital is always profit-seeking and needs to find ways to make money. The Japanese stock market had risen too high in the early stage, and with Ishinomori Shigeru's opposition to loose monetary policy, the attractiveness of the Japanese stock market has greatly decreased, forcing capital to look for other ways.

Just at this critical moment, China "opens the floodgates," and A-shares welcome top-level good news, attracting capital that cannot find a place to go. As an American hedge fund manager said, "ALL IN China," which is the mentality of many international investors now.

So, can A-shares continue to rise after the holiday? It depends on subsequent policies, especially whether fiscal policies will exceed expectations.

As mentioned earlier, this surge is purely driven by money and sentiment, with no actual change in the economic fundamentals. The manufacturing PMI in September is still below the 50 boom-or-bust line, and the non-manufacturing PMI has fallen to 50.0, just one step away from "breaking the line." This means that after the effects of monetary policy and sentiment gradually fade, the stock market may once again reflect the economic fundamentals. To continue to rise, more good news needs to be introduced in the short term.

Monetary policy has already exceeded expectations and cannot introduce new measures. The only remaining option is fiscal policy. Foreign media reported that we are preparing to issue 2 trillion yuan in special government bonds to stimulate consumption and resolve local debt issues.

If this is true and can be implemented as soon as possible, it will be an additional benefit for both the real economy and the stock market, and the stock index can continue to rise strongly. On the contrary, if the intensified fiscal policy cannot be implemented for a long time, it is unknown when the economic fundamentals will improve, and the stock market may subsequently lack growth momentum or even decline.

In summary, everyone must pay attention to policy trends during and after the holiday to see if there are additional fiscal policies introduced. This is not only related to whether the 5% GDP growth target for this year can be achieved but is also directly related to everyone's wallet, especially for stock investors who are heavily or fully invested. Never think that it is now the time to "lie and earn."

Making money has never been easy, it was not in the past, it is not now, and it will not be in the future. Otherwise, there would be no poor people in this world. However, in reality, wealthy people are always scarce in any era and any country.

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