23 October 2016
Given low oil prices and weak market sentiment, even revived merger rumors will not be able to boost the share prices of PetroChina and other oil majors. Photo: Bloomberg
Given low oil prices and weak market sentiment, even revived merger rumors will not be able to boost the share prices of PetroChina and other oil majors. Photo: Bloomberg

Why A shares are unlikely to rebound soon

The “national team” has been supporting the Shanghai market.

So the mainland stock market has almost stabilized, but it still lacks a catalyst for an upward move.

China’s widely watched military parade Sept. 3 has demonstrated its military power.

However, ordinary people care more about real economic growth.

The latest economic figures for August are not exciting, in a sign that Chinese firms need more supportive measures from the central government to stimulate growth.

To cushion against weak exports and consumption, Beijing has accelerated investment in infrastructure projects.

It hopes to boost economic growth for the second half of this year through massive government spending.

Nevertheless, it’s widely expected that China may fail to hit its 7 percent growth target this year and that growth in gross domestic product might only be 6.8 percent at best.

Naturally, the equity market has been weighed down by the poor economic data.

Mainland investors had too high expectations for Beijing’s reform policies in the first half of the year, leading the stock market to deviate from the performance of the real economy.

Everything comes down to the fundamentals now.

Individual investors should learn from their bitter lesson to pick good companies rather than focus on fancy ideas.

In fact, many mainland investors have treated the stock market as a casino, and, like most gamblers, they are eager to recoup their losses.

Speculation on stock index futures remains rampant despite cooling sentiment in the broad market.

The China Financial Futures Exchange announced Wednesday the tightening of rules for trading stock index futures, in an attempt to clamp down on excessive speculation.

The exchange intends to raise margin requirements for futures contracts, settlement fees and ao on. 

However, while the move may help reduce risk, it will not create a market rally.

The key is to restore market confidence and increase liquidity.

Turnover in the Shanghai and Shenzhen stock markets amounted to only 748.8 billion yuan (US$117.8 billion) Wednesday, reflecting lackluster sentiment.

To lure money back into the stock market, the authorities always create “themes” for investors.

The rumor that China’s three oil giants are ready to merge has resurfaced.

The country’s three largest oil firms are studying how to deepen reforms, media reports said, citing sources at the research agency of the State Council.

In fact, the rumor has very limited significance.

It remains unclear whether the share prices of PetroChina Co. Ltd. (00857.HK)  and Sinopec Corp. (00386.HK) can reverse their decline as a result of the rumor, given falling oil prices.

It’s very difficult to drive up stock prices amid sluggish market sentiment unless there is a major policy incentive.

The Shanghai Composite Index has been trying to search for a bottom around 3,000 points.

Equity funds have about 82 percent of their holdings in equities. For mixed funds, the proportion is 32 percent.

The market has very limited further downside.

Investors will come back when monetary policy, the macro economy and foreign exchange reform all get back on track.

Meanwhile, market volatility may continue, and investors should focus on stocks, such as insurance and property counters, with good earnings, attractive valuations and the potential to benefit from government policies.

Also, defensive sectors like food and drugs may have limited exposure to slower growth.

This article appeared in the Hong Kong Economic Journal on Sept. 4.

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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