28 October 2016
With Britain's cooperation, the internationalization of the renminbi is taking another big step forward. Photo: Bloomberg
With Britain's cooperation, the internationalization of the renminbi is taking another big step forward. Photo: Bloomberg

A-share market takes a breather before top party meeting

While Hong Kong was on public holiday for the Chung Yeung Festival, the mainland stock market was open. After days of gains, the Shanghai Composite Index started falling in the afternoon, closing down by 3 percent at 3,320 points.

All sectors, except financials, were down. Over 2,000 shares on the mainland market fell, with more than 800 reaching the 10 percent daily limit.

But as transaction volumes continue to climb, the market should see bigger growth after the current adjustment.

The National Day golden week is over, so the focus is on the upcoming fifth plenary session of the 18th Central Committee of the Communist Party of China.

New energy, electrical vehicle and information technology companies have recorded notable increases.

After several months of adjustment in the A-share market, investors have learned their lesson. Unilateral rise is no longer seen in the market. Instead, we see intervals of rises and corrections.

It’s a good thing if investors can leave just after having booked some profit, allowing the market to make healthy corrections.

Although the Shanghai Composite was down on Wednesday, market sentiment improved; the combined transaction volume for Shanghai and Shenzhen was 117 trillion yuan (US$18.42 trillion), a two-month high.

Before a major Communist Party meeting is held, stock speculation usually revolves around related companies.

But when the meeting starts, market correction normally occurs. If the meeting comes up with positive surprises, another round of speculation will begin.

The fifth plenary session begins on Monday. I believe the market will not see a large-scale rebound immediately, but will wait for the results of the meeting before responding.

Concept stocks related to Chinese President Xi Jinping’s visit to the United Kingdom are also worth looking at.

The People’s Bank of China and the Bank of England announced on Wednesday that they signed an agreement to renew the existing reciprocal sterling/renminbi currency swap line for three more years.

The maximum value of the swap line was increased to 350 billion yuan from 200 billion yuan when the original three-year swap was forged in June 2013.

In addition, the PBoC has issued its first offshore yuan bonds in London. The bonds are expected to raise US$787 million (5 billion yuan), offer an interest rate of 3.1 percent and mature in 2016.

With Britain’s cooperation, the internationalization of the renminbi is taking another big step forward and Chinese financial institutions stand to benefit from it.

Despite the market correction on Wednesday, Industrial and Commercial Bank of China (601398.SH), China Everbright Bank (601818.SH) and Minsheng Bank (600016.SH) were up more than 5 percent.

Bank of Communications (601328.SH) and China CITIC Bank (601998.SH) were up 4 percent.

The gains may also be backed by the “national team”, including China Securities Finance Co. Ltd. (CSF), among other financial institutions, which shows the government’s will to save the market.

Sources expect China’s social security fund will soon be allowed to invest in the A-share market.

Data shows that the social security fund opened 46 new A-share accounts in July. It was the first such move since July 2014, and the biggest in terms of amount since November 2008. The social security fund so far has 310 accounts in A-share markets.

The number of shares held by the social security fund climbed 50.17 percent from 615.64 million by the end of June to 924.47 million by end of September. Their market capital was up 49.58 percent.

Unlike CSF’s preference for big cap stocks, the social security fund focuses more on returns, so its portfolios have more small-cap growth stocks.

These include Shenzhen Overseas Chinese Town (000069.SZ), Zhejiang Juhua (600160.SH) and Sinopharm Group (600511.SH).

This article appeared in the Hong Kong Economic Journal on Oct. 22.

Translation by Myssie You

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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