27 October 2016
Capital account convertibility may be piloted at the Shanghai free trade zone. Photo: Xinhua
Capital account convertibility may be piloted at the Shanghai free trade zone. Photo: Xinhua

A shares may face post-plenum corrections

The A-share stock market is likely to face some corrections this week after announcements from the Communist Party plenum put an end to market speculation about the results of the meeting.

Expectations of new policies allowed the mainland stock market to perform well in October.

The Shanghai Composite Index climbed 10.8 percent in the month while the Shenzhen Stock Exchange Component Index was up 15.6 percent.

Sectors and concepts expected to benefit from the policy pronouncements, including environmental protection, technology and reform of state-owned enterprises, saw notable increases. Some stocks surged more than 30 percent.

On the other hand, companies like information technology firm Sunyard System Engineering Co. Ltd. (600571.CN) and SOE reform concept firm Luoyang Glass Co. Ltd. (600876.CN) were down 9 percent and 12.9 percent respectively last week.

The average daily transaction volume fell to about 900 million yuan (US$141.9 million) last week from 1 trillion yuan in the previous week.

Investors’ confidence recovered in October, and they are unlikely to withdraw their money from the stock market soon.

However, investors may be waiting for more good news, so there’s a chance the market will be quiet for a while.

Official data for October shows that the sub-index of new orders rose for the second month while the overall purchasing managers index (PMI) stayed at 49.8, reflecting improving demand in the manufacturing sector.

Last week, the authorities released a pilot plan for the Shanghai free trade zone (FTZ). It said the FTZ will be the first to realize capital account convertibility and foreign financial institutions will be allowed to hold less than 49 percent stakes in joint venture brokerages in the zone.

In addition, it expects to attract long-term investment in domestic stock, bond and fund markets from overseas.

Foreign investors are very interested in the mainland market, although issues pertaining to transparency and regulation are major concerns.

Mainland authorities should step up efforts in enhancing regulatory policies to attract more foreign investors.

Market correction is inevitable after several weeks of gains. Sectors covered by the 13th Five-Year Plan concept, including environmental protection and information technology, have a bright outlook and will continue benefit from government incentives in the coming five years.

Investors may consider them for long term investment.

In the short run, stocks related to China’s second-child policy still have room to rise.

For example, Bright Dairy & Food Co. Ltd. (600597.CN) has underperformed the market index in past weeks. Its share price may see a breakthrough, benefiting from the policy shift.

This article appeared in the Hong Kong Economic Journal on Nov. 2.

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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