The Chinese Market Mystery

SHANGHAI/NEW YORK – China’s economy is showing strong signs of recovery, with fourth-quarter data indicating a rebound across all sectors. But, while the country’s burgeoning recovery recently lifted consumer sentiment to a five-month high, the country’s stock-market performance has remained weak.

Indeed, in late November – after a year of accommodative measures and mini-stimulus policies – the Shanghai Stock Exchange (SSE) Composite Index closed below 2,000, for the first time since January 2009. Less than a month later, Chinese shares rose by 4.3%, bolstered by the index’s largest single-day gain since October 2009, a reflection of rising confidence inspired by strong manufacturing data. But, when the World Bank raised its forecast for Chinese economic growth in 2013 to 8.4%, the index closed flat, at 2,162.

The SSE ended 2012 with a 3.17% up-tick, and it is currently close to 2,280. But, if China’s economy is rebounding, why is its equities market responding slowly – and at times negatively – to strong signs of recovery?

Last November, the SSE still ranked only seventh worldwide in terms of capitalization, at $2.2 trillion – far behind the stock exchanges of New York, London, and Tokyo. The market value of the New York Stock Exchange’s Euronext is more than six times higher than that of the SSE. Even Tokyo’s market is valued at 1.6 times Shanghai’s.