HONG KONG -- Stock prices in Shanghai are creeping back up after a year-end slump that carried over well into January. Concerns about China's financial system and economic foundation could limit the upside, though.
The Shanghai Stock Exchange Composite Index on Jan. 20 dipped to 1,991, its lowest point in about five and a half months. Now the index is hovering around 2,100.
A big worry gnawing at investors is liquidity in the money market. The People's Bank of China, the country's central bank, has begun reining in fund supplies that swelled amid efforts to stimulate the economy. Short-term interest rates increased in June and December of last year. Upward pressure on the rates in January, with demand for funds surging before the Lunar New Year holidays, chilled the stock market.
Shadow banking, a system in which intermediaries sell investment products through major banks, is also a source of anxiety. One so-called wealth management product, marketed by China Credit Trust through the Industrial and Commercial Bank of China, gave the market a scare last month by coming perilously close to default. This added to the pressure on interest rates as banks clenched their cash in preparation for the worst.
Recognizing the spreading unease, the PBC on Jan. 21 injected funds into the system for the first time in four weeks.
China Credit Trust also served up good news at the end of the month, announcing its product would not default after all. It remains unclear how the trust company found the funds to repay investors; some believe the monetary authorities, fearing serious turmoil, ordered local governments and the relevant financial institutions to bear the burden.
China's manufacturing and nonmanufacturing purchasing managers' indexes for January, released during the holiday period from Jan. 31 to Feb. 6, were sluggish. Nevertheless, since the break, the SSE index has managed to weather selling pressure. The market appears to have regained a semblance of steadiness.
On the other hand, the widespread view is that China's economic growth will continue to decelerate. And experts warn that one of these days, a wealth management product is bound to go bust.