Every stock market chart tells a story. And the chart above is no exception. It highlights investors' roller-coaster ride over the past 5 years since the Shanghai stock market hit its all-time peak of 5903 in October 2007:
• After this it collapsed until October 2008; rallied fiercely till July 2009; and then resumed its downwards path, closing last night back at its 2009 lows
• Overall, the Index is now down 67% since its peak
Clearly the past 5 years have been a great time for nimble traders, able to play the rallies and avoid the collapses. But the story of the past 3 years is a worrying sign for all those who believe that China's economy is about to boom once more.
China's new leadership have a difficult, perhaps impossible, task ahead. They now have to reverse the economy's course since entering the World Trade Organisation (WTO) in December 2001. Essentially, they have to boost domestic consumption to replace lost exports to the West:
• After entering WTO, China continued to reposition its economy to become export-dependent, reducing consumption's share of GDP from 65% in 2000 to just 37% today
• Now exports are slowing fast. But rebuilding domestic consumption will take years to achieve. Only 45m Chinese earn over $20/day ($7600/year). The vast majority, 765m, earn $2-$10/day
As Yao Jingjuan, former Statistics Bureau chief economist warned Monday:
"The demographic dividend is dwindling sharply. We haven't made substantial and fundamental progress in transforming the country's growth pattern and raising domestic demand, a need that was highlighted as far back as the Asian financial crisis in 1997. We are now back in the same place where we've had a change in the external environment and a recession in developed countries. Our factories have had to slash production or shut down."
The stock market is thus acting as a leading indicator of the likely changes ahead.
Companies hoping for a rapid recovery in China's economy may instead have to be patient. They will also have to redesign products to prioritise affordability not premium pricing.
Over the next few years, China can no longer rely on making expensive goods to sell to the West. It instead needs to start producing relatively cheap products to sell domestically and in other low-income markets.