22 March 2019
Chinese authorities aim to curb undue speculative activity in equities to ensure a more healthy market in the long term. Photo: Reuters
Chinese authorities aim to curb undue speculative activity in equities to ensure a more healthy market in the long term. Photo: Reuters

China markets face policy risks but trend reversal unlikely

China’s A share market plunged on Monday after the government disciplined some brokerages for violating rules on margin lending. The market slumped by 7.7 percent, the biggest one-day slide in six-and-a-half years. The Hang Seng Index also lost 1.51 percent, while the Hang Seng China Enterprises Index slid almost 5 percent.

Actually, big shareholders of leading brokerages already pocketed their profit in advance. For example, Citic Ltd. (00267.HK) has offloaded 3.16 percent stake in Citic Securities for around 10 billion yuan.

The China Securities Regulatory Commission has intensified a crackdown on brokerages’ margin lending business while the banking regulator has vowed to tighten supervision on shadow banking products.

The preemptive move was aimed at cooling the market ahead of the unlocking of 2 trillion yuan of capital that will target new listings. Speculative activity also needed to be curbed as weak 2014 GDP data would fuel expectations for another round of monetary easing.

It’s quite obvious the market bull has to take some pause since Beijing introduced a rate cut in late November. Authorities are hoping for a healthier market when increasing new-share supply, which would provide companies another financing channel. That would assist Beijing’s efforts in restructuring the economy.

The cooling measures shed some light about Beijing’s thinking. The government will use a heavy hand to cool the market, but it has no intention to reverse the trend line. Rather, authorities would like the stock market to gain momentum in a more sustainable and gradual manner.

That being said, the Shanghai Composite Index is very likely to hover around the 3,000 points level. Sectors such as insurance, banking, brokerage and infrastructure have been chased by retail investors recently, leading to substantial gains in the share prices. However, a technical sell-off could hit these plays badly, which would offer a good buying opportunity after the correction is over.

Various stocks could post divergent performance as the market is heading to the Lunar New Year and earnings season. Therefore, investors should diversify their bets in different sectors. Overbought plays might face short-term downside pressure, while oversold counters like gold and oil could provide some interesting opportunities in the near term.

From the medium-term perspective, investors should enhance their bets on sectors with government policy support, such as infrastructure, healthcare, insurance, banks, power, and free-trade zone related entities.

Beijing aims to cool down the market hype, but economic reform looks set to bring some good news in order to restore confidence in the new leadership. Thus, the A-share market won’t head south barring some temporary corrections.

Meanwhile, Hong Kong’s H-share market has also gone through key changes in last two or three decades. The Shanghai-Hong Kong Stock Connect and A-share bull run have almost turned the H-share market into a by-product. Going forward, the H-share market will be closely linked to A-shares, given increasing fund flow from the mainland.

People should take into account potential risk in administrative measures on the mainland while making investment decisions. Also, global funds will mainly adjust their holdings of H-shares that are heavily exposed to mainland economic and political changes. And the forthcoming Shenzhen-Hong Kong Stock Connect and the possible inclusion of A-shares into MSCI will also take the H-share market into a new chapter.

This article appeared in the Hong Kong Economic Journal on Jan. 20.

Translation by Julie Zhu

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columnist at the Hong Kong Economic Journal

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