There’s been a lot of panic in recent weeks about the colossal collapse of China’s stock markets, from both banks and Beijing.
But Goldman Sachs thinks naysayers have got it all wrong — the dip has just been a “fast and furious” correction, not a systematic collapse.
By the middle of last week China’s benchmark Shanghai Composite Index tumbled over 30% since its highs of June. That followed a huge surge of over 150% since January 2014 as ordinary Chinese poured billions into stock markets.
The rout was only halted after the government put a ban on selling shares. That was a last resort after several other interventions failed to stop the fall. Shares have since rallied but the jury is out on whether Beijing’s actions are anything more than a temporary solution.
Analysts are using some crazy language to describe the crash — Deutsche Bank calls it a “bubble”; Bank of America Merrill Lynch thinks it could become “similar to the subprime crisis” in the US; and Credit Suisse is worrying about the effects on “social stability” and saying China is in a “triple bubble.”
Pretty much all of them agree that the only thing keeping markets at current levels is Beijing’s intervention. And as a result, most fear a further collapse if the stabilising measures are withdrawn.
But Goldman Sachs says in a note sent to clients on Monday that it thinks the fall has just been a “fast and furious correction” that has largely run its course.
The slump was caused by people using borrowed money to invest in shares and then being forced out of the market by falling prices.
Analyst Kinger Lau and his team think this “deleverage cycle” is two thirds of the way through. Lau definitely doesn’t think this is the start of a sustained slump for China where artificially inflated values come crashing back to earth.
That’s a very different call to Citi, which said last week it thinks only a quarter of leveraged investors have been forced out and said markets have further to fall.
Goldman expects another Rmb 400 billion (£41.6 billion, $US64.4 billion) of selling. But the bank doesn’t see this triggering another sharp drop in prices, given Beijing’s clear determination to prop up markets.
As a result of all this, Lau and his team are urging investors to buy stock in China right now, saying that the falling prices mean some large companies now look cheap compared to historical prices.