22 October 2016
Investors should not be overly cautious as more funds are expected to enter the A-share market. Photo: Reuters
Investors should not be overly cautious as more funds are expected to enter the A-share market. Photo: Reuters

Why investors should remain bullish on A shares

Chinese Premier Li Keqiang said he is confident the country will be able to meet its economic growth target of around 7 percent this year despite substantial downward pressure.

The remarks were intended to ease concerns among global investors in the wake of recent gloomy economic figures.

China has the ability and confidence to meet the target and maintain medium-to-high-speed economic growth, Li said during his visit to Latin America. The nation’s new level of opening up will bring opportunities for other countries as well, he added.

Further interest rate and RRR cuts

The government has adopted various measures including interest rate cuts, lower reserve requirement ratio (RRR) for banks, tax reductions, and increased investment in infrastructure projects.

Many domestic brokerages expect China’s consumer price index will expand below 1.5 percent in the second quarter amid low food prices. As such, the central bank may introduce further rate and RRR cuts as early as June.

The market is widely expecting further monetary easing. However, a commentary published by the People’s Daily reminds market participants to be realistic about massive monetary stimulus and be wary of Beijing’s resolve to pursue structural reforms.

The remarks basically repeat the central bank’s rhetoric and offer nothing new. Investors should instead look at the central bank’s behavior rather than listen to what it says in terms of the monetary policy direction.

Beijing has pumped ample liquidity into the market over last six months, although it has repeatedly stressed that it won’t roll out massive monetary easing measures.

Meanwhile, the overnight Shanghai Interbank Offered Rate (SHIBOR) has dropped to below 1.05 percent, the lowest in nearly two years.

Beijing has also unveiled various key incentive policies in recent months, which would offer excuse for market speculation.

The consumption market is set to improve because of the wealth creation effect of the red-hot stock market.

More funds coming to the market 

Market participants have been widely expecting the inclusion of A shares in the MSCI index, which is likely to attract some US$12 billion of new capital into A shares.

In fact, the daily turnover of mainland markets has surpassed 2 trillion yuan (US$322.5 billion) recently, setting a fresh record for global markets.

Therefore, mainland investors alone already have a strong momentum to push up A shares, and the inflow of foreign capital will only add further strength to the mainland markets.

The whopping gains of A shares have already attracted market attention. FTSE Russell, one of the world’s largest index providers, said on Tuesday that it will launch two transitional indexes that include China’s A shares.

The indexes will have an initial weighting of 5 percent for A shares. That will rise to 32 percent when the shares become fully available to international investors.

Goldman Sachs noted in its recent report there’s 50 percent chance for the MSCI index to add A shares in June. If it doesn’t happen this year, the inclusion will definitely take place next year.

Beijing has shown a clear determination to boost the growth of China’s capital markets.

The Shanghai Composite Index has already jumped 51.82 percent so far this year, and the government believes the market has further upside. It is likely that Beijing will unveil further stimulus to lift the market.

Therefore, investors should not be overly cautious in a bull market.

This article appeared in the Hong Kong Economic Journal on May 27.

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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