Window of Opportunity? China's countless property developers are always eager to see lower borrowing costs. Photo: Andrew Vanburen

Translated by Andrew Vanburen from a Chinese-language piece by Sinafinance blogger Lao Gumin

IN THIS VOLATILE Chinese stock market, target prices and index predictions have recently been more about wishful thinking than rational objectives.

Shareholders often scan over the financial pages of their favorite broadsheets, keep their ears perked for any mention of their portfolio picks and even compulsively punch stock codes over and over again into search portals in tireless attempts to stay ahead of the curve and receive news or broker recommendations on their holdings before the masses.

But we garden variety, ordinary retail investors must remember that a lot of initiations and recommendation upgrades are prompted by the tight client relationships that often exist between brokerages and bourse counters.

These oftentimes overlooked ties between call-makers and counters are clearly stated in the form of a warning in every broker call worth its salt.

Therefore, investors should of course take such calls and target price estimates with a grain of salt or two when considering whether to buy, hold or sell, while never taking the ultimate objectivity of the rating as gospel.

It is only natural -- a part of human nature -- that brokerages would be a bit more forecast-friendly to their clients.

But another sphere of prognosticating that research houses engage in is placing bets, as it were, in the form of market reports forecasting where bourse benchmark indices are headed over a certain period.

Market watcher Lao Gumin says not all forecasts are created equal.
Photo: Sinafinance

This institution of guesswork is perennially compromised by the notion that “a rising tide lifts all boats.”

When a brokerage goes out on a limb and forecasts a major jump in share prices across the board for a particular capital market, assuming shareholders take the bait, then a buying frenzy will often ensue.

And we all know the windfall that brokerages enjoy on high turnover days and trading commissions.

As for China’s benchmark Shanghai Composite Index – chief tracker of A- and B-shares listed in Shanghai and Shenzhen – it has been on a mini spurt of late, rising 2.6% over the past five trading days to finish at 2,157.62 by the end of the trading day on Tuesday.

So taking into consideration all the potential conflicts of interest balanced with a desire to act with professional, disconnected impartiality... whose word should we take for the potential staying power of the current mini-bull run in Shanghai and Shenzhen?

In other words, when will the current upswing run out of gas?

There have been encouraging signals of late that news on the macroeconomic and global stages is looking rosier by the week.

China Shares:  Long overdue for an upswing?

Monday’s market rise at home followed strong recent performances by shares in the US and Europe.

In addition, market rumors that stamp taxes would be further reduced and IPOs would be frozen for a period to prevent market liquidity crunches did keep the rally in China alive early this week.

And recent inflation figures in the PRC suggest the Beijing might be willing to move more toward growth and stimulation and away from an overriding fear of the potential for rising CPI numbers.

That can only be good news for cash-strapped counters in the property development and heavy industry sectors.

In summary, market reports from the dozens of houses watching and covering A shares should be used much as long-distance drivers might a dashboard-mounted GPS device.

We can punch in our target destination and let the machine do the navigating.

But if we don’t like the road conditions, or maybe we are stuck in a traffic jam, we always have the option to recalibrate our GPS devices.

See also:

Five China Sectors About To Get Hot

BUCKING TREND: China Shares Ready For Rebound?

TOUGH TALK: Dissecting China Market Fall, Fate

What’s Depressing P/Es In China?

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