The mainland market rebounded 2.28 percent on May 8 after posting a three-day decline last week. The Shanghai Composite Index fell 5.31 percent last week, ending a rally for eight straight weeks.
The sharp correction has worried authorities, and the People’s Bank of China (PBoC) stepped in quite quickly. On Sunday the central bank announced a 0.25 percent cut in the benchmark interest rate, a move that is likely inject some momentum for the market this week.
Monetary easing measures will continue to benefit mainland property stocks. These plays have dropped by nearly 10 percent during the market correction last week. The situation presents a good opportunity to accumulate large property stocks.
The consumer price index (CPI) rose 1.5 percent in April from the year ago, below the market expectation and the 2 percent growth in the last eight months.
As a result, companies will struggle with rising real interest rates without a timely rate cut given the declining prices. That could hurt the country’s real economic growth. Authorities will have to cut interest rates further.
The latest interest rate cut marks a shift in the country’s monetary stance from “prudent” to “loose”, said Industrial Bank chief economist Lu Zhenwei.
The PBoC is likely to adopt normalized reserve requirement ratio cuts and pledge supplementary lending to cap interest rates.
Apart from the rate cut, the central bank also widened the deposit-rate ceiling to 150 percent from the benchmark, a move that could affect the earnings outlook for Chinese banks.
However, Zhou Mubing, deputy chairman of the China Banking Regulatory Commission, hinted that the long-time statutory regulatory indicator of loan-to-deposit ratio will be taken only as a reference for regulators. Therefore, bank loans are likely to surge, benefiting their operations.
The mainland stock market has surged for eight straight weeks after the annual “Two Sessions” meeting. Many stocks have already touched record-high levels.
But the Shanghai market posted a losing streak for three days last week amid a lack of further stimulus measures. The Shanghai Composite Index once lost as much as 8 percent.
Transport, construction and property stocks have suffered sell-offs during the correction. In contrast, the information technology sector has become the best performer with over 50 percent jump after Beijing reiterated its support for the so-called Internet Plus strategy.
Sunyard System Engineering Co (600571.CN) soared 33 percent last week, making it the biggest gainer among plays in the Shanghai-Hong Kong Stock Connect.
However, the outlook is less rosy for state-owned enterprise (SOE) stocks that have more than doubled so far this year. These stocks are likely to be dumped during market correction given that their rise was fueled by speculation.
Investors should be selective in buying SOE plays. China State Construction Engineering Co. (601668.CN) and China Railway Construction (601186.CN) remain attractive as they have already lost over 20 percent from the peak.
This article appeared in the Hong Kong Economic Journal on May 11
Translation by Julie Zhu
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