The stock market in mainland China has surged 60 percent so far this year on the back of massive capital inflows and positive expectations for reform.
It is not a bad thing if the A shares take a pause now that their inclusion in the MSCI Emerging Markets Index has been delayed.
It’s unavoidable that the market should go through some consolidation after the Shanghai Composite Index surpassed 5,000 points recently.
The total market capitalization of the Shanghai and Shenzhen exchanges has reached 67 trillion yuan (US$10.8 trillion), and the total market cap of floating shares reached 56 trillion yuan, making it the second-largest equity market in the world.
However, the holdings of foreign investors account for a marginal 1.3 percent of A shares if we combine the quotas for the qualified foreign institutional investor scheme, the renminbi qualified foreign institutional investor scheme and Shanghai-Hong Kong Stock Connect.
So, authorities are set to step up efforts to open up the market in the second half of the year.
The Shanghai benchmark is likely to hover around 5,000 in the second half after posting a 60 percent jump so far this year and doubling last year.
And the Chinese central bank is poised to further cut interest rates and the banks’ reserve requirement ratio (RRR) to bolster economic growth. That could lend some support to the market.
The latest data shows the slowdown in economic growth has started to stabilize.
Industrial value added rose 6.1 percent last month, compared with 5.9 percent in April.
And fixed-asset investment increased 11.4 percent for the first five months of the year from the same period last year, compared with a 12 percent rise in the first four months.
Growth in gross domestic product is likely to ease further to below 7 percent in the second quarter.
There is room for three rate cuts and four to five reductions in RRR. If done, the effects will start to set in late this year and pave the way for economic recovery next year.
It usually takes six months for monetary measures to have an impact on the real economy.
The conditions for the bull market remain intact, including loose monetary policy and reform measures.
The historical price-earnings ratio soared to 25 times after the Shanghai benchmark hit 5,000 points. And the forward P/E ratio rose to 20 times.
China needs to deepen its reforms to benefit the bottom line of firms to justify such valuations.
Last month, bank loans rose 900.8 billion yuan, 192.9 billion yuan more than the previous month, data from the central bank shows.
Medium- and long-term loan rose 206.3 billion yuan, up 49.5 billion yuan from the month before, in a sign that the real economy may start to pick up.
Also, the Shanghai interbank offered rate eased to 1.42 percent last month, down 1.07 percentage point from April and down 1.14 percentage point from the same time last year.
The repurchase rate weakened to 1.3 percent, down 1.07 percentage point from April and down 1.26 percentage point from the same time last year.
Lower interest rates will reduce financing costs for companies.
Ample liquidity remains a key factor underpinning the stock market.
If economic growth shows an upturn next year, that would create more momentum in the market in the medium and long run.
This article appeared in the Hong Kong Economic Journal on June 16.
Translation by Julie Zhu
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