From Tokyo to Mumbai, there’s been plenty of anxious chatter recently about how China’s bull market — which turned 883 days old this week — may have finally run its course. At the end of Asian trading on Thursday, the Shanghai Composite Index had fallen 8.2 percent in three days, its worst performance since mid-2013.
That was before Jack Ma, chairman of China’s e-commerce giant Alibaba, had his say. After the close of trading on Thursday, the company reported a 45 percent jump in fourth- quarter revenue, handily beating Wall Street estimates. To anyone who wondered whether the 105 percent rally in Shanghai shares over the past year was over, Alibaba’s success seemed to offer a sharp rejoinder.
But Alibaba’s position — and the Chinese economy’s — is more ambivalent than it seems. Before diving back into China’s froth-filled stock market, investors would be wise to take a second look.
First, credit where it’s due: Ma’s efforts to diversify Alibaba and reach the 557 million Chinese who access the Internet from their smartphones and tablets are gaining traction. Sales rose to $2.8 billion in the first three months of this year. And Alibaba does offer the best available snapshot of the health of China’s middle class. A one-stop shop for 1.3 billion people — selling goods and services in sectors ranging from retail to entertainment to real estate — Ma’s company gives a better sense of China’s ebbs and flows than any government data set.
But by naming a new CEO, Daniel Zhang, Ma seems to have acknowledged that Alibaba is entering a highly uncertain and volatile period. Alibaba is constrained by a domestic economy that is growing at its slowest rate since 1990, despite efforts by the government to recalibrate the country’s economic engines. Meanwhile, Ma’s push outside China has yet to gain traction.
Meanwhile, there’s a very real danger that Alibaba’s latest earnings report will encourage people to throw fresh fuel into a stock market that has raced far ahead of Chinese fundamentals. The MSCI China Index’s price-to-book ratio is the highest since March 2012 and return on equity is the lowest since the global financial crisis. Morgan Stanley, which is downgrading Chinese shares, has said that China is seeing its weakest corporate profits since 2009. BNP Paribas has been highlighting China’s ballooning margin debt.
Alibaba’s change in leadership should serve as a warning to the millions of average Chinese who are still rushing into the country’s stock market — and to the government that has been encouraging this risky behavior.
China’s long-term rally, which Ma’s earnings jump is liable to reignite, is part of a global stock market boom that has affected Wall Street, too. But the policy responses in Washington and Beijing couldn’t be more different. In the U.S., Federal Reserve Chair Janet Yellen is warning of imbalances, calling market valuations “quite high.” In China, officials are going the other way, effectively screaming “buy, buy, buy”to a fast-growing army of day traders.
In recent days, amid the downturn in Chinese stock markets, the country’s state-run media has rushed out a series of market- calming articles. “There’s adequate upward momentum, so market bullishness will continue,” Xinhua reassured investors. “Both regulators and stock investors hope to see steady and healthy development of the market.” Xinhua hinted that Beijing plans on further easing fiscal and monetary policy, while holding off on increasing stamp duties on stocks and new IPOs.
China hopes rising shares will bolster economic confidence. But mainland markets are being driven less by genuine optimism than the “Zhou put,” or central bank Governor Zhou Xiaochuan’s penchant for rescuing markets the way Alan Greenspan did when he ran the Fed. To augment Zhou’s monetary failsafe, China now seems to be rolling out a “Xinhua put” to keep the good times going.
The problem with bubbles is they require constant reinforcement. That distracts Beijing from implementing the structural reforms it needs to create balanced and sustainable growth. President Xi Jinping should think twice about fanning a bull market so out of step with economic realities.
Just ask Ma, who’s arguably as close to the front lines of China’s economy as anyone else. From where he sits, China’s outlook isn’t as vibrant as its surging equities suggest.
