China stocks outperform on optimism over Beijing\'s fiscal policies

The Shanghai stock market is by far the best-performing market in the world this year and the Shanghai Composite index is the only leading equity market to have risen since Lehman Brothers went bankrupt in September.

Do Chinese investors know something the rest of the world does not?

Stock market analysts who follow the mainland market are divided over whether the gains for the Composite index – which has risen 33.2 per cent this year and 16.6 per cent since Lehman's failure – reflect a belief in a sustainable economic recovery or are merely another wild swing in a market ruled overwhelmingly by sentiment.

The Composite index closed yesterday at 2,425, a seven-month high, based mostly on speculation that the Chinese government will spend enough on stimulus measures to overcome a record drop in exports and help the local economy out of its current slowdown.

The index has risen 42 per cent since hitting a low of 1,706 on November 4 last year but is still well below the 6,092 closing high it reached in mid-October 2007.

Shanghai's recovery follows a Rmb4,000bn ($585bn) government stimulus package (announced in November), five interest rate cuts and a government-mandated year-on-year rise of nearly 25 per cent in bank lending in February.

The measures are aimed at achieving the government's target growth of 8 per cent in gross domestic product this year, partly by bringing forward several years' worth of infrastructure projects and ensuring that they are built in time to stimulate the domestic economy at a time when the global economic crisis has savaged China's exports.

“Mr Market is telling us that it's highly possible the regime can switch the economy from exporting Barbie dolls to America, to stimulating its own domestic economy” Robin Griffiths at Cazenove Capital in London told Bloomberg.

Real estate market analysts also point to a substantial recovery in property transactions in some of the major cities in the past few weeks, though they caution that it may be too soon to say that the property market has bottomed out.

Chris Peng, a Shanghai investment analyst, thinks Shanghai's market rebound is solid and “likely to continue as positive monetary and fiscal policies are gradually taking effect”.

“The reality has turned out to be much better than expected,” he says, noting that 2008 corporate earnings fell much less than forecast and electric power generation has begun to increase.

But Jerry Lou, Morgan Stanley China strategist, says Shanghai is in the grips of “a sentimental recovery, not a fundamental recovery”, powered largely by highly speculative retail investors. Lending has risen but exports have collapsed and retail sales growth has slowed considerably – “that sounds like something unpleasant developing underneath,” he says. “At some point things could unwind very unhappily.” The release of economic data for the first quarter could prove the precariousness of the rally, some analysts have cautioned.

In the crowded public trading hall of Shenyin Wanguo Securities in central Shanghai yesterday, retail investors – many of whom are still facing losses of more than 50 per cent, in spite of the current rally – are hoping that the government will find a way to ensure the rally continues. Huang Wen Xia, 61, a pensioner and regular user of Shenyin Wanguo's public trading terminals, says “90 per cent of the people here are trapped in the market [by their losses]”.

Qian Hui, a construction worker who says he has nearly all his savings invested in the market, says he has begun buying stocks again in the past few weeks, as the index has climbed – but his goal is only to recover losses that still exceed 50 per cent.

China's securities market regulators are also banking on a sustained recovery in the market. They announced this week that they hope to launch a much-awaited Nasdaq-style second board in Shenzhen in August to help istart-up companies to raise funding. But this plan could be delayed if the market rebound falters.