28 October 2016
Home prices in Shenzhen surged 6.3 percent in July from a month earlier and were up 24 percent from a year ago. Photo: Bloomberg
Home prices in Shenzhen surged 6.3 percent in July from a month earlier and were up 24 percent from a year ago. Photo: Bloomberg

Investors should stay put as A shares remain weak

Both Shanghai and Shenzhen markets slumped more than 6 percent on Tuesday. As I’ve warned earlier, there’s a risk in over-speculating on SOE reforms. The market has given up all its gains in the previous week.

Rumors have it that the “national team” has stayed away as market has been stabilizing recently.

However, the market suffered another sharp fall despite there being no major bad news. That could further hamper Beijing’s efforts to restore market confidence.

The market posted a steady recovery for two weeks after the “national team” intervened in early July.

However, rumors that it would exit the market caused the Shanghai benchmark index to plunge by over 8 percent on July 27.

That has prompted Beijing to firmly state that the “national team” won’t exit from market, which led to another three weeks of stability.

The stock market posted a whopping gain in the first half, fueling investor optimism.

However, many investors switched to short-term speculation after the recent market slide. Investors would readily take profit, which is the reason why much capital flees when the market reaches 4,000 points.

Nevertheless, Shanghai and Shenzhen market turnovers hit a three-week high of 1.39 trillion yuan (US$217.2 billion) on Tuesday. Market sentiment remains jittery, and investors choose to leave at any sign of increased volatility.

Property prices up

By contrast, they are more comfortable in property investment. New home prices rose in 31 of the 70 monitored cities in July, from 27 in the previous month, according to data released by the National Bureau of Statistics on Tuesday.

Housing prices in China’s four tier-one cities rose by over 1 percent in July from from the previous month. In Shenzhen, prices surged 6.3 percent from a month earlier and were up 24 percent from a year ago.

Mainland property stocks have been dragged by high inventory levels since last year.

However, the housing market has been improving as a result of Beijing’s monetary easing measures. Many property developers have beaten market expectations in interim results.

First-half net profit was up more than 50 percent for Deluxe Family Co. (600503.CN) and Xinhu Zhongbao Co. (600208.CN), while earnings of China SCE Property Holdings (01966.CN) more than doubled.

Most Hong Kong-listed mainland property developers are industry leaders, and they outperform their mainland-listed peers during the market downturn.

They have more attractive valuation than mainland plays, although market speculation in the sector is more heated on the mainland.

Huayuan Property (600743.CN) has touched the daily up-limit for three straight trading sessions despite its poor earnings. However, the whole sector lost 8.5 percent on Tuesday.

Open-market operations

The People’s Bank of China conducted seven-day reverse repurchase agreements worth 120 billion yuan on Tuesday to inject liquidity into the financial system.

The accelerated capital outflow resulting from the devaluation of the renminbi may prompt the central bank to act faster in cutting interest rates.

Mainland property developers will be the biggest beneficiary of such a move.

Investors can collect property stocks on the mainland or Hong Kong market at attractive valuations.

Beijing monitors market

The “national team” has stated that it would stabilize the market at low but won’t drive up the market.

A number of stocks have hit the daily up-limit in the past few days as a result of heated speculation on the reform of state-owned enterprises. There is no need for the “national team” to bail out.

The latest market slide has released some selling pressure from profit-taking investors, and it would prompt Beijing to follow the market movement more closely.

Investors should not rush to the market given the current uncertainties.

This article appeared in the Hong Kong Economic Journal on Aug. 19.

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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