24 October 2016
The central government will step up efforts in stimulating growth, and infrastructure is set to be a key theme. Photo: Bloomberg
The central government will step up efforts in stimulating growth, and infrastructure is set to be a key theme. Photo: Bloomberg

Infrastructure stocks look promising as stimulus measures loom

The Shanghai Composite Index was close to 4,300 points on Tuesday before it returned to its mid-May level. That means the market lost 900 points it gained between mid-May and mid-June in just six trading days.

However, there was strong support at 4,200 points, luring bottom-hunting capital. Northbound trading posted a net buying of 7.07 billion yuan (US$1.14 billion).

But market turnover in Shanghai and Shenzhen dropped to 1.3 trillion yuan on Tuesday, down from the previous peak of 2 trillion yuan.

More capital will come back to the market after the lock-up period for new shares ends, and this could release 1.9 trillion yuan on Wednesday, according to China International Capital Corporation.

Nevertheless, market liquidity continues to be sapped. Apart from the IPO deals, more than 500 companies have raised capital of up to 1.54 billion yuan so far this year, surpassing the full-year figure for 2014.

Also, senior management officials and key shareholders in 1,403 companies cashed out some 56.9 billion yuan in May alone.

It’s quite sensible for companies to raise capital amid a red-hot equity market. It’s not a bad thing if this capital is deployed for business expansion.

The robust stock market has offered cheap financing for companies.

It remains unclear whether the strong market gains would create wealth for households. According to the latest central bank survey, 16.9 percent of households expressed plans to spend more in the second quarter, down 1.6 percentage points from the first quarter. 

Meanwhile, some consumers have delayed buying a car and invested the money instead in the stock market. Many housewives have also stopped visiting online shopping sites to focus on stock trading, according to local media reports.

To what extent will the bullish stock market help the real economy? Research shows that a 10 percent rally in the Hang Seng Index will boost the city’s consumption by 1.1 percent. However, the actual consumption boost is only around 0.2 percent.

The HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index (PMI) rallied to 49.6 in June, hitting a three-month high, but remained below the 50 mark which separates contraction from expansion.

Therefore, the central government will step up efforts in stimulating growth in the second half, and infrastructure is set to be a key theme.

China Railway Construction (601186.CN) and CRRC Corp. (601766.CN) jumped 5 percent while China Railway Group (601390.CN) was up 4 percent on Tuesday.

The market has rebounded as liquidity returns, but it remains unclear whether the rally is sustainable.

Market turnover may struggle to hit a new record, given that local authorities are tightening margin trading and short selling. 

Therefore, the Shanghai Composite Index may continue to hover around 4,000 and 5,000 points.

Investors have to be patient as the bull market cycle is likely to continue for three to five years.

This article appeared in the Hong Kong Economic Journal on June 24.

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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