Speculation that financial authorities will use next week’s Golden Week holiday, when stock markets in China are closed, to announce a new stimulus plan for the country's financial markets does, in the short term explains the rally Friday and for this week.
Although the Shanghai Composite Index lost 6.3% for the third quarter, the index rose 1.5% Friday and finished up 2.9% for the week. The China Securities Regulatory Commission, according to the China Securities Journal, is considering lowering taxes on investing in securities. That would follow on other measures the commission has take this year to support stock prices: a 25% reduction in stock-trading fees and expedited approval for foreign investors.
In the longer run, the market's climb also reflects the gradual easing of some of the tensions surrounding the once-in-a-decade transfer of party and government leadership taking place this fall. Last week saw the re-emergence of Xi Jinping, tagged as likely new leader, back into public view after a two-week absence.
Friday, the Politburo announced that Bo Xilai, the Communist Party chief in Chongqing and who had been expected to challenge for a seat on the Standing Committee of the Politburo, had been expelled from the party. Bo has been found guilty of accepting bribes, improper relations with women, and abuses of power in attempting to cover up the murder of British businessman Neil Heywood by Bo’s wife Bogu Kailai. She received a suspended death sentence on Aug. 20.
The expulsion of Bo from the party apparently cleared the way for the official transfer of power to China’s new leaders. Friday, at the same time that he announced Bo’s expulsion, outgoing President Hu Jintao finally gave a firm Nov. 8 date for the party congress that will see the new leadership take power. The long delay in setting a firm date had raised worries in China that what was hoped to be a smooth transfer of power had dissolved into infighting at the highest levels of the party.
Given the growing consensus that China’s relatively slow response to the slowdown in the country’s economic growth was a result of paralysis at the top of the government, resolving Bo’s status and setting a date for the transfer of power are reassuring events for investors in China’s markets.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.