The Strategist

Chinese stock market loses to Japan

08/08/2018 - 09:43

The Shanghai Stock Exchange has been showing very weak results this year. This fact has become yet another reason for China to climb down to the second line in the ranking of the largest stock markets. Now, the country’s main Asian competitor is Japan. After the Friday's decline in the stock price, according to Bloomberg, the volume of Chinese securities fell to 6.09 trillion dollars. The volume of Japanese securities was a little bit larger, 6.17 trillion dollars. However, both the Japanese and Chinese stock markets are very far from the American market. In the US, the volume of the securities market slightly exceeds 31 trillion dollars.

Thus, Japan regained its second place in the rating of stock markets lost at the end of 2014. And the trend seems to be in its favor. The Chinese stock market set a "personal record" in June 2015, exceeding 10 trillion dollars. This year, both shares of Chinese companies and the Chinese currency are experiencing very strong pressure from trade disagreements with America. The government's attempts to reduce the debt and increase the pace of economic development also have a serious negative impact on the PRC's stock market.

"The loss of second place is a consequence of the trade war," explains Benny Lam, head of research at CEB International Investment Corp. in Hong Kong.

The Shanghai Composite Index has fallen by more than 16% in 2018, which is one of the worst results among the largest stock exchanges. The first week of August was the worst in almost a month and a half. The situation for industrial and high-tech Chinese companies does not promising either.

At the meeting of the Politburo of the Communist Party of China held on the last day of July, it was decided to pay more attention to the growth of the economy as well as support it. The government is also going to take into account the unfavorable conditions, which occurred in the trade war with the United States.

"The market will continue to fluctuate at low levels for the next couple of months," said Linus Yip, analyst at First Shanghai Securities Ltd., "However, there are good chances that the Chinese stock market will regain its positions and again rise to the second place in terms of capitalization, because the economic fundamentals are stable and the economy will continue to grow after a short-term decline."

The second line of the rating is a reminder of the place that China occupies in the world financial markets. Of course the position is high, but still it does not correspond to the economic strength of the country. This discrepancy is clearly seen in the example of the yuan, which share in world payments fell from June 1.88% to 1.81% in July, according to the data of the Society for Worldwide Interbank Financial Telecommunication.

Despite the fact that the Japanese index Topix in 2018 declined by about 4%, the Japanese stock market remains one of the best in Asia due to the fact that the main Japanese bank - Bank of Japan - continues to support exchange-traded funds, and most local companies keep developing successfully. Almost 60% of Japanese companies have surpassed the forecasts of specialists this year.

The yuan has weakened in the past six months by more than 8% against the dollar. The Chinese currency has been declining for the eighth week in a row, which is a record figure since 1994. So far, there are no particular signs of intervention of the Chinese central bank. This means that the yuan will continue to fluctuate, and so will the stock market of the country.