23 October 2016
More reforms are in the pipeline to address the oversupply in the iron and steel industry. Photo: Reuters
More reforms are in the pipeline to address the oversupply in the iron and steel industry. Photo: Reuters

Mainland markets cheer Fed rate hike

Finally, the US Federal Reserve announced a 25 basis point interest rate hike.

With the uncertainty eliminated, global stock markets rebounded, and so did the A-share market.

The Shanghai Composite Index closed at 3,580 points on Thursday, up 1.81 percent, while the Shenzhen Composite Ondex was up 2.5 percent.

The overall transaction volume was 996.4 billion yuan (US$153.7 billion), up by 270 billion yuan from the previous trading day. Over 2,400 stocks recorded an increase, and only 54 fell.

Market sentiment has clearly improved.

All sectors rose on Thursday. Real estate companies, steel and iron firms, and electric equipment stocks are among the best performers.

Funds have been chasing real estate stocks for some time. Several institutions are rushing to buy market leader Vanke (000002.CN). The top two buyers bought 2.65 billion yuan worth of Vanke shares on Thursday, pushing up the share price to reach the 10 percent daily limit.

Other developers, including Shenzhen Heungkong Holding Co. Ltd. (600162.CN) and Poly Real Estate Group (600048.CN) also rose 10 percent.

The whole sector surged 4.45 percent.

The central government has been trying its best to help resolve the restocking issue in the real estate sector. The central bank is also expected to further cut interest rates.

Meanwhile, more reforms are in the pipeline to address the oversupply in the iron and steel industry.

In the first 10 months, 101 large and medium-sized iron and steel companies accumulated a net loss of 38.64 billion yuan. Loss from their main business was 72 billion yuan, and the average profit margin was negative 1.5 percent.

The iron and steel sector rose 3.54 percent on Thursday. If the reform turns out to be successful, the sector is likely to bottom out.

Meanwhile, frenzied stock market trading earlier in the year fueled a surge in brokers’ revenues and bolstered stamp duty income for the government.

Between January and September, stamp duty revenue rose 410 percent from a year ago to 205.4 billion yuan. It contributed to 30.94 percent of the overall tax growth, or 1.7 percentage points of the growth rate.

Minus the stamp duty revenue, overall tax revenue rose only by 368.55 billion yuan, or 3.8 percent year on year. This means that without an active stock market, the government’s tax revenue could have been in trouble.

Amid an economic slowdown and shrinking corporate earnings, the authorities need an active equity market.

The central government meeting on economic work is about to start soon. The market expects it to discuss financial reforms, among other topics.

This article appeared in the Hong Kong Economic Journal on Dec. 18.

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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