26 October 2016
Mainland investors Investors will stay in the market on expectations of further monetary easing, according to Deutsche Bank. Photo: CNSA
Mainland investors Investors will stay in the market on expectations of further monetary easing, according to Deutsche Bank. Photo: CNSA

What will sustain the market rally

While mainland stocks remain strong, their Hong Kong counterparts have witnessed a correction.

On Tuesday, the Shanghai Composite Index rose 0.43 percent to close at 4,135 points.

Infrastructure, cement and railway plays continue to lead the rally, with brokerage stocks also making gains.

The market will focus on first-quarter gross domestic data due out Wednesday that could trigger a correction.

Nevertheless, mainland investors remain bullish. They might take any bad news in a positive way.

Since the rally began in November, corrections have lasted only one or two days before buying kicked in again.

Turnover remained high during those episodes, with some buyers going in to underpin stock prices.

Meanwhile, the Hong Kong market has rallied for eight straight days on a massive influx of capital from the mainland.

On Tuesday, turnover topped HK$200 billion (US$25.8 billion) despite a lower close.

Many people noted that the Hong Kong market tends to fall into a pattern similar to that of its mainland counterpart.

That could mean the Hong Kong correction may also take just one or two days.

Monday’s disappointing trade data has not dampened market sentiment.

Railway freight, a key component of the so-called “Li Keqiang Index”, fell 9 percent to 870 million metric tons in the first quarter from the previous year, unchanged from the same period in 2010.

M2 money supply rose 11.6 percent in March from a year earlier, missing market expectations of 12.3 percent growth and slowing from February’s 12.5 percent pace.

Chinese banks lent a combined 1.18 trillion yuan in March, beating expectations of 1.04 trillion yuan. February lending was 1.02 trillion yuan.

The Chinese central bank is carefully managing money supply, with officials saying they will continue to flexibly adopt a prudent monetary policy.

The first-quarter GDP is quite likely to fall below 7 percent, stoking market expectations of further monetary easing in the second quarter.

The government may roll out more fiscal measures to speed up infrastructure projects.

Premier Li Keqiang has underlined the continued economic slowdown and vowed to enhance targeted macro controls.

The central bank is expected to cut banks’ reserve requirement ratio once in April and slash interest rates once in May.

However, M2 money supply could rise 14 percent by the end of the year, according to Deutsche Bank.

Investors will stay in the market on expectations of further monetary easing, it said.

Apart from government stimulus, some big private projects such as Shanghai Disneyland Park have become hot market topics.

The resort may open in the spring next year, according to a company management.

The news quickly ran up relevant stocks such as Shanghai Jingjiang International Industrial Investment (600650.CN), Shanghai Qiangsheng Holding (600662.CN), Shanghai ShenTong Metro (600834.CN), Shanghai Zhangjiang Hi-Tech Park Development (600895.CN), Shanghai Jinjiang International Hotels Development (600754.CN) and Shanghai Jielong Industry Group (600836.CN).

The Shanghai benchmark has slowed since it broke 4,000 points but certain stocks continue to have momentum.

The market rally remains intact on the back of massive turnover. However, the market is likely to take a pause after months of sharp gains.

This article appeared in the Hong Kong Economic Journal on April 15.

Translation by Julie Zhu

[Chinese version 中文版]

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a columnist at the Hong Kong Economic Journal

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