For the year the Consumer Current conditions Confidence Index reached a new height in May and then started declining, hitting the bottom for the second stage. The index then rebounded somewhat in September and October, only to see significant decreases again in November and December. The decreases reflected the adverse impact of fluctuating prices and a volatile stock market.
Prices: One thing remarkable about China' macroeconomic development in 2007 had been its rising prices. The prevalent price increases of consumer goods apparently have adversely impacted consumers' normal spending habit as more daily expenditures are being squeezed out of family earnings. Consumers began to notice the weakening purchasing power of their money on hand. Naturally they felt that their current conditions were on a decline. In retrospect, China's CPI took a marked increase since May, led by rising prices for pork and other food items, and reached a peak for the second stage at 6.5 in August. This inversely mirrored the continuous decline in the Current Index. Prices dropped slightly after August while the Current Index inched up somewhat. But then CPI reached another new height. The rebound of the current index became short-lived.
Stock Market: During 2007, as consumers' investment enthusiasm steadily grew, the impact of the stock market's volatility to consumer confidence became ever more significant. As stock market indices climbed up, consumers' book income from their stock market investment increased. So would the Consumers Sentiment Index. For example, before May 30, 2007, the stock markets were persistently bullish, contributing to higher investment income for consumers. Therefore one witnessed a marked climb of the Current Index in May over April. Heading into August and September the stock market indices once again climbed up significantly, contributing to the improvement of the Current Index. But because of the "the-stock-gains-more-than-you-do" phenomenon associated with the current bull market, the span of the stock market index movement lagged behind that in April and May. With the nose-dive of the stock markets in November, Consumers Current Index took a tumble. The continued decline of the Current Index in December in a way reflected the inter-play of persistent high prices and a depressed stock market.
Review of the Consumer Future Expectations Index
During the first half of 2007 the Consumer Future Expectation Index had been on a steady increase, only to turn south after July. The Consumer Future Expectation Index's gain in the first half of 2007 was attributed principally to the persistently rising housing prices. Nationwide, when real estate prices began to rise at the beginning of the year, many consumers would view this as a good investment opportunity. Accordingly the Consumer Expectation Index tracked closely the earnings expectation of real estate investment. In this case the Expectation Index would follow the earnings expectation and rise. When the real estate price increases surpassed the buying capacity of the general market, consumers' view on real estate investment suffered. They would lower their earnings expectation on real estate investment. At the same time, consumers were concerned that an over-priced real estate market would severely affect the potential of the local macroeconomic development in the mid- to long-term. The inter-play of the above two factors contributed to the decline of the Future Expectation Index since July.
It should be pointed out that the above analysis covered general trend of the national Expectation Index only. Notwithstanding the rising housing cost nationwide, the Expectation indices for the different parts of the nation vary greatly as a result of differing degrees of socio-economic development levels. Moreover, other factors such as the "Olympic expectation" and the nation's export tax rebate policy adjustment would also affect the Expectation Index, though the impact differs greatly in different parts of the nation. We will offer more insight in the ensuing sections.
But the optimistic outlook for 2008 does not assure a smooth sailing. What happened in 2007, albeit stock market crashes, or even the "the stock index gains more than you do" phenomenon, may recur in 2008. In our view, there will be three drivers influencing the course of the Chinese stock market in 2008: the government's macroeconomic policies, U.S. dollar depreciation/RMB exchange rate, and the Olympic Games. The first two drivers are inter-related and will influence the fundamental direction of the stock market. If the U.S. dollar hits the bottom and rebounds, attracting capital to leave China, the government may implement more stringent macroeconomic policies that could wreck havoc with the market support, resulting in stock market corrections. The Olympic Games, on the hand, may change investors' stock investment sentiment, causing volatile stock market movements. Specifically, before the Games open, the stock composite index may reach a peak this year. Around the months of April and August, the stock market may see large movements in response to annual reports or the Olympic Games pronouncements. Moreover, individual investors will encounter more difficulties making money in the stock market in 2008. Having said that, we believe China's economic development is still on a high growth mode. Even if the stock market may experience shakeouts, it does not foretell the end of the bull market. Any talk of the end point of the bull market is simply premature.
