Beijing has been actively intervening in the market in light of fragile investor sentiment and substantial selling pressure. However, the tactic won’t work in the long run.
PetroChina’s (00857.HK, 601857.CN) A share is nearly double the price of its H share thanks to government buying. That has deviated from market fundamentals as oil prices continue to fall.
The market rescue efforts have led the government to a dilemma. The China Securities Regulatory Commission pledged Monday night that the government will increase its stock buying activities to stabilize the market.
The watchdog was reacting to market rumors that the government may soon pull back on its support for the market.
It also vowed to probe “malicious” dumping of shares by big investors, which contributed to Monday’s plunge.
Individual investors should be free to buy and sell stocks whenever they like. But the government has prohibited major shareholders from selling in order to stem the market slide.
Small retail investors might follow suit. They won’t like to be accused of “malicious short-selling”.
Financial heavyweights have replaced the role of oil stocks in trying to rescue the market. Brokerages like Guosen Securities (002736.CN) and SooChow Securities (601555.CN) both hit the daily up-limit on Tuesday.
Guotai Junan Securities (601211.CN) and Haitong Securities (6000837.CN) soared over 5 percent.
There is limited room for Beijing to further intervene in the market. Therefore, the market may trend downward, and small and mid-cap stocks with poor earnings outlook are likely to suffer most.
Information technology stocks may continue to be under pressure. The sector lost nearly 5 percent on Tuesday, Yonyou Network Technology (600588.CN) and Hundsun Technologies (600570.CN) both touched the daily down-limit.
Meanwhile, I still favor mainland insurance stocks. Industry leaders with good earnings have become more attractive after the market slide.
However, the market outlook remains uncertain, and investors should be more cautious in short-term speculation.
They could collect policy-driven stocks as medium-term investment, especially stocks that may benefit from China’s 13th Five-Year Plan.
Many investors believe the economic uncertainty in China may cause the US Federal Reserve to delay the start of its tightening cycle until 2016, according to Goldman Sachs analysts.
The Fed said in June that the global situation could be one of the factors for postponing the rate hike.
If so, it could ease the capital outflow from China and benefit its economic growth.
Still, investors should be wary of many other market uncertainties.
This article appeared in the Hong Kong Economic Journal on July 29.
Translation by Julie Zhu
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