Late last month, Morgan Stanley predicted that China’s stock market would tumble by as much as 30% in the year ahead. China’s government criticized the report (paywall) but it was accurate; two weeks later, China stocks have already fallen 30% from their mid-June high.
But Goldman Sachs isn’t buying the story of a complete market crash. The US investment bank’s chief China equity strategist, Kinger Lau, believes the CSI 300 Index can rise by 27% in the 12 months ahead. “It’s not in a bubble yet,” Lau told Bloomberg, backing up his July 1 prediction. “China’s government has a lot of tools to support the market.”
The government does indeed have a lot of tools, including state media control, rate cuts, and the ordering of banks and state-owned enterprises to buy stocks. Today it became clear that to keep stocks propped up, the central bank is practically buying them itself (paywall). But that hasn’t stopped the outflows yet.
So what looks good to Goldman Sachs? First, the central bank could simply keep relaxing monetary policy, Lau told Bloomberg. It has lowered interest rates four times since November, and at 5.1% there is still room to maneuver. It could also further relax rules on margin lending (paywall), to encourage brokerages to lend more money to those who want to buy stocks. And while Lau acknowledges some stocks are wildly overvalued, he believes there are plenty that trade at more reasonable valuations.
Given the wild swings of China’s stock markets, it’s certainly possible that markets could rise 27% in the next 12 months. On a day in which as few as 22% of listed Chinese companies can be traded at all, though, it’s a bold call to say the least.