22 October 2016
The Chinese markets have stabilized a bit following steep losses in recent months, but it is too soon to call for a fresh bull run. Photo: Xinhua
The Chinese markets have stabilized a bit following steep losses in recent months, but it is too soon to call for a fresh bull run. Photo: Xinhua

Why A-share investors should stay cautious near term

After lacking any clear direction for two days, China’s stock markets saw some correction on Wednesday, with the Shanghai benchmark index shedding 1.7 percent.

As there have been no policy announcements yet from the Communist Party’s Central Committee meeting, more than 1900 stocks fell yesterday.

However, only ten counters recorded 10 percent limit-down falls. This suggests that investors haven’t given up hopes of some positive news from the CPC plenum.

Steel and auto stocks were among the few that outperformed the market yesterday. Some steel firms even put on gains of 10 percent.

The good performance of the steel sector is somewhat confusing, given that the latest industry data has not been satisfactory.

Zhu Jimin, deputy head of the China Iron and Steel Association, was cited by mainland media as saying this week that the industry is in severe oversupply and that some steel product prices have hit new lows, hurting the financials of companies.

The industry official noted that rapid demand growth for steel products is now history. Although firms have been cutting output, there’s still a mismatch between supply and demand, he said.

While the comments serve as a warning, investors however seem to be ignoring the news. 

I must say I find it hard sometimes to understand investors’ behavior. What is the reason for the bullishness? Are they expecting the industry to bottom out or that companies will benefit from restructuring moves?

Now, turning to another sector, media reports have speculated that authorities might lower on-grid electricity prices by the year-end in a bid to stimulate the economy.

If the rumor turns out true, power generation firms will be impacted, although it could benefit some end-users.

The country’s total consumption of electricity was 456.3 billion kilowatt hours in September, down 0.2 percent over the same month last year.

A slight reduction in electricity prices may only have limited impact in terms of turning around the overall economy.

In the past, electricity consumption served as a major indicator for the health of the economy. But the country undergoes a structural transformation, relying solely on energy consumption data may not be appropriate.

As for the stock market prospects, it may be difficult for A-shares to stage a strong rebound before the year-end.

Many observers feel that Beijing is unlikely to launch further monetary easing policies in the current quarter. Meanwhile, the pension fund won’t begin its equity investments before 2016.

While some foreign investors have begun to again express confidence in A-share prospects, many are still maintaining a wait-and-watch stance as they await policy initiatives from the government.

Against this backdrop, it may take a while for the markets to regain their footing. 

Adapted from an article appeared in the Hong Kong Economic Journal on Oct. 29.

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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