15 September 2019
China's stock markets are gripped by negative sentiment despite a raft of supportive measures from Beijing. Photo: Reuters
China's stock markets are gripped by negative sentiment despite a raft of supportive measures from Beijing. Photo: Reuters

Why A-shares will remain subdued for a while

The Shanghai Composite Index has been moving in the range of 2,800 and 3,200 points over the last three weeks. The market would turn south every time it rebounded close to 3,200 points, which has become a resistance level for the near term.

The benchmark slipped below the 3,000 level at one point on Sept. 15, but stabilized at the close. It could, however, slide again to the 2,800 mark in the coming days.

The market always reacts more dramatically to bad news than to good news, given the generally bearish sentiment. A state-owned enterprises (SOE) reform plan released last weekend has failed to inject any impetus. By contrast, rumors of clean-up of off-market financing have stoked panic.

The so-called off-market financing is actually margin financing and short-selling. Investors borrow money through financing companies to buy stocks. There are different estimates on the actual size of the off-market financing, ranging from 500 billion yuan to nearly 2 trillion yuan. Nevertheless, the rampant off-market financing has driven up the mainland market in the first half of this year.

As of September 11, authorities have cleaned up 3,255 accounts, representing 60.85 percent of the total accounts, in margin lending curb since this July. And there are 2,094 accounts yet to be cleaned up.

The market turnover of Shanghai and Shenzhen has continued to decline due in part to the deleveraging effort, falling from a peak of 2 trillion yuan to below 500 billion yuan.

The deadline of the “clean-up” move will arrive at the end of this month, which has re-ignited market fears that liquidity could contract further. The SOE reform plan has not given any boost for the market. The capital injected by the “national team” has failed to change the market direction.

Beijing has announced various measures to rescue the market in recent months. However, stocks have continued to trend downward.

State financial institutions and government funds — the so-called national team, have targeted financial plays and oil giants in their purchasing moves. This is the reason why, for example, China Life Insurance (601628.CN), Bank of Communications (601328.CN) and Agricultural Bank of China (601288.CN) outperformed on Sept. 15. The stocks lent some support for the Shanghai benchmark.

In contrast, the Shenzhen market, which is dominated by private and small firms, has largely been neglected by the “national team”. As a result, the Shenzhen Composite Index has tumbled to the bottom of the year at 9,290 points, marking a drop of 16 percent so far this year.

The National Development & Reform Commission has announced a string of infrastructure projects, more than double the number announced in July and August. However, the news has only stimulated certain relevant stocks.

The A-shares market may not be able to find momentum anytime soon due to overwhelming negative sentiment, despite various stimulus measures from Beijing. The market may set new lows if there is no new incremental liquidity.

Investors do not believe in the “reform bull” story any more. Given this, the government should let the market proceed with the correction for a while.

A-shares have yet to reach the rebound stage in the short term. That said, it would be a good buying opportunity for long-term investors. They could gradually collect some stocks that can sustain high earnings growth, and wait for the market rebound.

This article appeared in the Hong Kong Economic Journal on Sept. 16.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal