FREE FALL OR ADJUSTMENT?

There has been a noticeable slump in the benchmark indices of the leading Chinese stock markets, which has caused a real panic throughout the financial world. It is no secret that the growth in the world economy in recent years has no longer been dependent on the USA but on the Chinese economy.

Many experts are asking the question: is what is now happening on the Chinese stock market a replica of the start of the Great Depression in the US or is it an adjustment of share indices on the stock markets after their astounding climb?

The situation on the Chinese stock markets is a question of fundamental importance for Azerbaijan. The Azerbaijani State Oil Fund (SOFAZ) has now begun investing in the Chinese yuan with the aim of supporting the diversification of the currency basket of the investment portfolio. Many experts have been criticizing SOFAZ for a number of recent investments which have shown a slump for some time. One only has to recall the beginning of investments of SOFAZ funds in gold when prices fluctuated at the level of 1,800 dollars per Troy ounce. Today the price of gold falls short of 1,200 dollars.

At this juncture investments in the Russian rouble and the Turkish lira have also not been justified, losing in price significantly over the past year. In addition, investments in a package of shares in the Russian VTB [Foreign Trade Bank] have been making a loss. But in April 2013, when SOFAZ acquired 2.95 per cent of VTB's shares, no-one had any idea that sanctions would be taken against Russia, and it was the bank that was subjected to them. The fund itself, however, believes that such investments are long-term and will bring a profit. So the fund should not be accused of an incorrect investment policy in a short-term perspective.

With the purpose of investing in the yuan, a licence was obtained at the Chinese Central Bank in 2014 for investments of 3 billion yuan (about 500m dollars), and a contract was signed on the purchase of government bonds and agents' securities. The first investment in the Chinese yuan began on 1 July. Investing in China's stock market is seen as the next stage. To this end it is planned to obtain a licence in the China Securities Regulation Committee of an "authorized foreign institutional investor".

But one has to ask the obvious question: isn't it a bit late for Azerbaijan to take part in China's stock market?

Administrative resources

The situation on the stock exchanges looks very threatening in view of the fall in indices over the past month despite the use of the whole administrative resource of the CPR's leadership. Specifically, the Shanghai Composite Index plunged 25 per cent in the course of the month, the Shenzhen SE Composite IX fell by 33 per cent and the Hang Seng Index by 6.72 per cent. 

In order to prevent a fall in the share indices the Chinese authorities unleashed a whole arsenal of administrative resources. According to the Xinghua agency, the Chinese People's Bank issued loans at a level sufficient to maintain liquidity at this juncture. For its part, the State Property Management Committee of the Chinese State Council banned government enterprises from reducing the share fraction of their holdings at a time of abnormal fluctuations on the stock market. And finally, the investigating bodies have found proof of manipulation by some companies on the futures market.

However, it is too early to say that China's stock markets have bottomed out. There are perfectly objective reasons for this, and such "nervous" moves by the Chinese leaders merely set one wondering.

The fact of the matter is that at the end of the year the Shanghai Composite Index soared by 83 per cent, and the Shenzhen by 84 per cent. There was a modest increase on the Hang Seng stock market where the index growth was about 7 per cent.

In other words, it boils down more to an adjustment on the stock markets after the rapid growth over the year rather than the times of the Great Depression in the USA. At the same time, it is highly probable that the "bottom" of the fall on the Shanghai and Shenzhen stock markets has not yet been reached and will continue for some time yet.

The Chinese "engine" of the world economy

The sharp fall in the indices on the Shanghai and Shenzhen stock markets has, of course, led to an adjustment in the plans of the management of a number of companies for initial public offerings (IPO), and the distribution of shares has been switched to a later date. Although it is understood that in the light of the Chinese leadership's projects in the context of the Silk Road economic belt, many Chinese companies will need additional capitalization, which is possible through the distribution of shares on the stock exchanges.

The point is that China is still able to maintain high rates of growth of GDP at the end of the second quarter of this year at a level of 7 per cent. The implementation of these new projects will help to maintain these rates.

And Chinese companies are actively supporting the government's policy to develop the economic belt. Specifically, by this year, out of the 110 enterprises under the control of the State Property Management Committee of the Chinese State Council, 107 opened foreign branches in 150 countries. Also, over 80 centrally-run enterprises set up branches in countries along the Silk Road belt.

That said, since the beginning of the 12th Five-Year Plan (from 2011 to 2015), the overall volume of assets of centrally-run enterprises abroad increased from 2.7 to 4.6 trillion yuan, with an annual growth of 12.2 per cent. The enterprises have created a large number of production lines of rolled steel, cement and glass in Malaysia, Laos, Mongolia and other countries. The railway equipment of enterprises like these is being used on six continents. Such infrastructure projects as the China-Russia, China-Kazakhstan and China-Myanmar pipelines, and others, have been carried out.

Accordingly, the shares of enterprises that will be involved in the implementation of the Silk Road economic belt will be distributed with increasing frequency on the Chinese stock market. Therefore, it is most likely that the shares of enterprises on China's stock markets will continue to grow.

In this connection, after some adjustment of indices on the Chinese stock markets, the interest of foreign investors in financial operations in these areas will increase appreciably.

It is probable that SOFAZ, after obtaining a trading licence at the China Securities Regulation Com-mission, will first take a step back, and after a stabilization of the situation take an active part in trading in securities on China's stock markets which have considerable potential for growth.