After a holiday period of brewing, the stock market has entered a period of fluctuation.
On October 11th, the three major stock indices opened lower, with securities stocks collectively weakening. The Shanghai Composite Index opened at 3,287.87 points, down 0.43%, the Shenzhen Component Index opened at 10,366.57 points, down 1.0%, and the ChiNext Index opened at 2,173.71 points, down 1.77%.
Looking back at the source of this round of stock market frenzy, it has to start with the interest rate cut.
On September 18th, local time in the United States, the Federal Reserve announced that it would lower the target range for the federal funds rate to 4.75% to 5%, which is a reduction of 50 basis points (one basis point is one ten-thousandth).
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This is the first interest rate cut by the Federal Reserve since the interest rate hikes in 2022, and it is also the largest single interest rate cut in recent years, reflecting the urgent desire to boost the economy.
On September 24th, the Governor of the People's Bank of China, Pan Gongsheng, also announced that the central bank's policy interest rate would be lowered, with the 7-day reverse repurchase operation interest rate reduced by 0.2 percentage points, guiding the loan market报价 interest rate and deposit interest rate to move downward in sync.
The two major economies have successively cut interest rates, and the magnitude is not low, which will inevitably have a significant impact on the global economy. Against the backdrop of more abundant market funds, the major global stock markets all rose after the Federal Reserve's interest rate cut. Among them, the A-shares and Hong Kong stocks that have been watched by investors for a long time have shown a strong upward trend.
Since mid-September, the Shanghai Composite Index has already broken through 2,700 points, and the stock market has been bleak. With the warm-up in the following week, starting from September 24th, A-shares have continuously welcomed a uniform red.
In just a few days, the total market value of A-shares has jumped from 74.98 trillion to about 90 trillion, an increase of about 15 trillion. Some people have calculated that if this number is allocated to each stock investor, it means that in just a few days, the average stock investor has earned more than 70,000 yuan.
The profit of people around is the most direct stimulus. During the National Day holiday, there were suddenly 6 million stock investor account applications, half of whom are "post-90s" and "post-00s". They crazily say that this may be the biggest opportunity they have to change their destiny, and even if they have to sell their pots and pans to borrow money, they should rush in.On the first trading day after the National Day holiday, October 8th, within just 20 minutes of the market opening, the turnover of A-shares exceeded 1 trillion yuan, setting the fastest record ever for reaching a trillion.
However, only one day later, on October 9th, the overall market saw more stocks falling than rising, which gave new investors a "wake-up call". Several securities firms successively published letters to investors, advising that "short-term sprees are not sustainable, and long-term returns are the most important."
Early on October 10th, several major announcements were made to "refuel" the market. First, the central bank announced the arrival of SFISF. Second, the merger plan between Guotai Junan and Haitong Securities was finalized, and the stocks of both companies resumed trading today, adding new themes to the stock market.
On October 10, 2024, Guotai Junan and Haitong Securities' A-shares both hit the daily limit upon resuming trading.
In addition, the State Council's Information Office will hold a press conference on October 12th, where relevant officials from the Ministry of Finance will introduce the situation regarding "increasing the counter-cyclical adjustment of fiscal policy and promoting high-quality economic development." The market is also very concerned about whether fiscal policy can effectively exert force.
Faced with the current booming stock market, we have to ask, is this round of the Chinese stock market a "strong rebound" or a "new bull market"?
The fluctuation of asset prices is indeed a monetary phenomenon and is influenced by emotions, making it difficult to predict. However, the intrinsic value or the true value of an asset is traceable; it is the present value of future cash flows. Now, understanding our assets from this latter perspective is more meaningful.
01
The Time Pattern of Interest Rate Cuts
If we take the Federal Reserve's interest rate cut as the time reference point, it is easy to find an interesting pattern: interest rate cuts in Western economies mostly occur within half a year before this time point; non-Western economies mainly announce interest rate cuts after this time and quickly lower interest rates in a short period.The "disequilibrium" in the timing of interest rate cuts across different economies is not coincidental but contains important codes for international financial markets.
The current round of interest rate cuts in Western economies began with Sweden. In May, Sweden, the leading economy in Northern Europe, cut interest rates by 25 basis points. In June, the European Central Bank lowered its three key interest rates by 25 basis points. In July, Canada and the United Kingdom successively announced a 25 basis point interest rate cut. On September 12, just before the Federal Reserve announced its rate cut, the European Central Bank once again announced a 25 basis point interest rate cut.
In June, the European Central Bank lowered its three key interest rates by 25 basis points / Image source: Visual China
After the Federal Reserve's rate cut, the tide of interest rate cuts in non-Western economies arrived. The fastest to cut rates was Saudi Arabia, which announced a 50 basis point reduction in the benchmark interest rate within a day of the Federal Reserve's rate cut, with the timing and magnitude of the rate cut generally consistent with the Federal Reserve. In addition, the United Arab Emirates, Qatar, and others quickly cut rates. Hong Kong, China, also followed suit, with the Hong Kong Monetary Authority quickly reducing the benchmark interest rate by 50 basis points within less than a day after the Federal Reserve's rate cut.
Why do Western economies generally cut interest rates before the Federal Reserve, as if they deliberately maintain "high consistency"?
One view holds that there is a smooth communication mechanism between Western central banks, and the Federal Reserve has released signals in advance, and everyone firmly believes that the Federal Reserve will cut rates in September.
Clearly, this view cannot be established. It is difficult for the Federal Reserve to "advance notice" to anyone that it will cut rates at a certain point, as it could easily lead to "insider trading" in international financial markets and be exploited by hedge fund managers like Soros.
So, what is the reason?
02
Why Open the Monetary FloodgatesThe advanced economies in the West have preemptively lowered interest rates, primarily due to an economy that is simply too weak. For instance, in the first half of 2024, Germany, the largest economy in the Eurozone, had a GDP of €2138.09 billion, which, after factoring out price changes, decreased by 0.2% year-on-year. Other economies also saw growth that fell far short of expectations. As a result, interest rate cuts became a necessary option to stimulate the economy. These economies have independent monetary policies, and their currency exchange rates are not pegged to the US dollar, allowing for policy maneuverability.
However, not all economies enjoy such freedom. The timing and extent of interest rate cuts announced by various monetary authorities in the Middle East have almost synchronized with those of the Federal Reserve. This is not, as some opinions suggest, due to a lack of "economic sovereignty," but rather because of the exchange rate system they have been implementing for years—their local currencies maintain a relatively fixed exchange rate with the US dollar. Therefore, to maintain stability in the foreign exchange and financial markets, it is imperative to keep in step with the Federal Reserve's monetary policy. The monetary policy of Hong Kong, China, follows this same logic.
The timing and extent of interest rate cuts announced by various monetary authorities in the Middle East have almost synchronized with those of the Federal Reserve / Source: Visual China
In contrast, the monetary policy of Mainland China is entirely independent and autonomous. Before the Federal Reserve's current round of interest rate cuts, China had already lowered interest rates multiple times, playing a positive role in promoting a rapid economic recovery. Starting from 2022, China entered a cycle of interest rate cuts. That year, China conducted three interest rate cuts and two reserve requirement ratio reductions, releasing valuable liquidity into the market. Since then, interest rate cuts or reserve requirement ratio reductions have continued, and the frequency has not been low.
During the same period, the United States entered a cycle of interest rate hikes. In March 2022, to address inflation, the Federal Reserve suddenly raised interest rates. By the time of the current round of interest rate cuts in 2024, the Federal Reserve had raised interest rates an astonishing 11 times.
But no matter how strong a currency may be, for any economy, the direction of the Federal Reserve's monetary policy cannot be ignored. The Federal Reserve's interest rate hikes and cuts are one of the reference variables that cannot be overlooked in the process of formulating monetary policy for other economies.About a week after the Federal Reserve's interest rate cut, the People's Bank of China announced a rate cut, which not only demonstrated the independence and autonomy of China's monetary policy but also highlighted the timeliness and forward-looking nature of monetary policy decisions. The global interest rate cuts that began in the first half of 2024 and peaked with the Federal Reserve's rate cut in September may only be the beginning.
A logical chain is becoming clear: the rising costs brought about by deglobalization and geopolitical shifts are irreversible, and inflation in the West is becoming an economic chronic disease, causing people to emotionally "desensitize" to inflation. This reduces the pressure on politicians and monetary policymakers to combat inflation. This means that central banks in developed markets have already broken through certain constraints.
Inflation in the West is becoming an economic chronic disease, causing people to emotionally "desensitize" to inflation / Source: Gu Xiang's chart
As a result, using expansionary monetary policy as a tool to stimulate economic recovery has become a priority. In other words, simply managing inflation is difficult to cure; on the contrary, allowing people to endure short-term inflation and fundamentally solving inflation through stimulation is a more feasible path. In a sense, this has become a consensus among Western central banks.
03
Who is driving this bull market
When the monetary floodgates are opened, the monetary anchor of global assets will change. China will inevitably be affected.
After the Federal Reserve announced the rate cut, A-shares quickly rose.
On the morning of September 24, People's Bank of China Governor Pan Gongsheng announced the rate cut, and A-shares rose again. Although the increase was not significant, by the close of the morning session, the Shanghai Composite Index returned to 2800 points.
Thus, before the 2024 National Day holiday, facing layoffs and after a long period of silence, some securities research institutes began to become active, successively releasing various research reports and expressing a very positive view of the capital market.A typical perspective is that the current uptrend is merely a test, with more stimulus measures potentially being introduced in the future. Beyond the leading blue chips and industry leaders, the future rising sectors are expected to be more "inclusive."
Securities research institutes are "bullish" for most of the time. One of the highest honors for securities researchers is the analyst ranking list, which concerns their career, and the main voting group is fund managers. Moreover, major funds are the primary holders of the aforementioned stocks. Therefore, this chain determines that securities research reports can only serve as a reference for measuring market sentiment and cannot be considered as investment guidance.
Of course, past prices do not fully reflect the value of Chinese assets. As long as the underlying assets are of sufficient quality, the mean reversion of value is just a matter of time.
Some foreign capital remains confident in China's capital market. Wind data shows that, as of the end of August, QFII (Qualified Foreign Institutional Investors) appeared among the top 10 circulating shareholders of 702 listed companies, with foreign enthusiasm still high.
What did the heavily invested margin traders buy? Choice data indicates that on October 8th, three stocks received net margin purchases exceeding one billion yuan. Orient Wealth (300059.SZ) topped the list with a net purchase of 1.404 billion yuan that day, followed by Contemporary Amperex Technology Co., Limited (CATL) (300750.SZ) with 1.383 billion yuan, and Ping An Insurance (601318.SH) with 1.115 billion yuan. Electronics, pharmaceuticals and biotechnology, and non-bank financials were the three most "money-attracting" industries that day.
However, on October 9th, the three major indices opened significantly lower, and by the close, the Shanghai Composite Index fell by 6.62%, the Shenzhen Component Index fell by 8.15%, and the ChiNext Index fell by 10.59%; the total transaction volume of Shanghai and Shenzhen stock markets for the day was 2.94 trillion yuan, a reduction of 512.1 billion yuan compared to the previous trading day.
Is this bull market just an ephemeral phenomenon?
04
The Stock Market and Real Estate Market Are Not the Core Assets of China's Economy
As the largest component of Chinese asset allocation, the real estate market is the focus of people's attention, and it is considered to have more "systemic importance" than the stock market.The reduction in the interest rate on existing housing announced on September 24 is of great significance for increasing residents' disposable income and is a true "benefit to the people," pointing towards boosting consumption. On the other hand, lowering the down payment ratio points towards a quick recovery of the housing market. At present, the effectiveness of the policy is still to be observed.
Boosting the housing market is not an overnight task, and it involves the overall confidence people have in real estate as a special asset category. Chinese investors' conviction in property assets began with the housing reform in 1998, which has been continuously fermenting and strengthening, reaching its peak in 2016. Now, we have come to another crossroads.
Boosting the housing market is not an overnight task, and now we have come to another crossroads / Image source: Gu Xiang's chart
In fact, when discussing the global trend of interest rate cuts and its relationship with Chinese assets, we must absolutely avoid two pitfalls.
One is narrow-mindedness. The other is short-sightedness.
Firstly, limiting the scope of Chinese assets to the stock and housing markets is a form of narrow-mindedness. The true competitiveness of China's economy on a global scale lies in its strong manufacturing supply chain, and the equity of high-quality companies on the industrial chain is the most core Chinese asset.
Data shows that in the first half of 2024, China's manufacturing industry actually used foreign investment of 141.86 billion yuan, accounting for 28.4% of the actual use of foreign investment, an increase of 2.4 percentage points year-on-year. High-tech manufacturing actually used foreign investment of 63.75 billion yuan, accounting for 12.8% of the actual use of foreign investment, an increase of 2.4 percentage points year-on-year. Foreign capital is very clear about where the core assets of China's economy are.
Another issue is that the value of Chinese assets should be viewed from a broader and longer-term perspective.
At present, the most popular valuation method in the global investment community is still the "Discounted Cash Flow Method," which means that the price of all assets is the discount of future cash flows — the numerator is the future cash flow, the denominator is the discount rate, and the result is the current price of the asset. In Buffett's view, this is not only a valuation technique but also an investment thinking framework.
Under this framework, if you want to increase the asset price of an economy, there are only two ways.One approach is to enable assets to generate more cash flow in the future.
For instance, making the rental yield of properties more reasonable and increasing property rents; doubling stock dividends so that even the "stingy" companies in the stock market can distribute dividends; or allowing companies to create more free cash flow through technological innovation or improvements in operational efficiency.
Clearly, these methods of enhancing the future cash flow of assets either point to macro-level reforms or innovations by micro-market entities, all of which are familiar concepts to us.
Another approach is to reduce the discount rate.
The essence of the discount rate is risk; the higher the risk, the lower the asset price. Among all risks, the stability of policy is an extremely important factor. In valuation, volatility is risk, and when policy fluctuates excessively, the risk increases, and the discount rate grows. Ultimately, the present value after discounting the cash flow decreases, and the asset loses value.
When global investors value assets in some underdeveloped economies, such as Latin America and Southeast Asia, they add a risk premium due to policy instability, thereby lowering their asset prices. Conversely, for economies with good governance and stable policies, a lower discount rate is assigned, overestimating their asset prices.
Clearly, discount thinking encompasses many important reform issues in the economic field. Examining the prices of Chinese assets from this perspective is far more valuable than overemphasizing the fluctuations in the money supply.
Currently, reforms in various fields of China's economy are steadily advancing, and the predictability and timeliness of policies are also evident.
The value of Chinese assets should not be underestimated.