China’s A-share market will regain its footing despite suffering the biggest one-day slide in five years on Tuesday, Credit Suisse said.
Yesterday’s plunge came after mainland authorities announced that low-rating bonds can no longer be used as collateral to back short-term loans issued as part of bond repurchase agreements.
The crash led to fears whether the recent rally in A-shares, which has seen the Shanghai Composite Index hit a four-year high of 3,041 points, has ended.
But Fan Cheuk-wan, Asia Pacific chief investment officer at Credit Suisse, said the correction will stabilize the market in the medium and long term, as it can curb undue euphoria and speculative activities.
“I believe the regulator sees the recent sharp increase in share prices as stemming from leveraging or margin financing activities, so it took the action to cool down the market,” she said.
“The move that tightens liquidity is actually good for the healthy development of the A-share market. We think that it’s a positive thing, as it strengthens risk control,” the Credit Suisse official said.
Stable growth of the A-share market will help boost the confidence of foreign institutional investors and is essential for next year’s capital reform in China, she said.
Margin financing is now accounting for 18 percent of the total trading volume, compared with less than 10 percent at the beginning of the year, according to Fan.
In other comments, she said the projected price-earnings ratio for the coming 12 months stands at 9.6 times, lower than the 10-year average of 14.1 times. It means that valuation of the A-share market is still reasonable.
The Shanghai benchmark index added 2.9 percent to close at 2,940 points on Wednesday following the release of November inflation data, which showed the slowest consumer price gain since 2009 and fueled hopes that authorities will boost stimulus.
Fan said the People’s Bank of China (PBoC) is likely to cut the one-year benchmark lending rate further by 40 basis points to 5.2 percent after the first quarter of next year.
The central bank is also expected to lower the reserve requirement ratio (RRR) from the current level, and adjust the loan-to-deposit ratio by including interbank deposits in the calculation.
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