27 October 2016
China's stock markets cannot rely too much on support from government-backed institutions and funds. Photo: Xinhua
China's stock markets cannot rely too much on support from government-backed institutions and funds. Photo: Xinhua

A-share markets: Why govt support will be limited

After a rout on Monday, China’s stock markets put in a mixed performance the following day. The CSI 300 Index gained 0.28 percent while the Shanghai Composite Index lost 0.26 percent.

According to reports, government-backed institutions and funds, the so-called national team, tried to support the market by buying blue chips. That may well be true as over 70 percent of the top 30 big caps posted gains on Tuesday.

The market, however, lacks upward momentum overall. The “national team” can only stop the market from falling too fast.

In the meantime, the securities regulator has required major shareholders of listed companies to promise that they won’t reduce their holdings.

All said, the market has its own logic. Investors’ confidence level remains poor. IT-related stocks which had been favored by speculators earlier fell the most on Tuesday.

Dawning Information Industry Co. (603019.CN) slumped 8.5 percent, Inspur Software (600756.CN) lost 8.1 percent and Sunyard System Engineering (600571.CN) dropped 6.4 percent.

Going forward, companies that announce weak annual results will come under pressure.

The other noteworthy point is that the pension fund is not yet entering the stock market. To let the pension fund buy stocks at a “safe” price, I believe the government will not intervene in the market unless there is a dramatic big fall like what happened on Monday.

In the near term, the market may hit a short-term low and may not rebound until the social security fund begins its equity investments.

In other news, the government seems have intervened in the renminbi exchange rate on Tuesday. Authorities will, however, won’t find it easy to control the unit’s movements given the recent reforms.

Onshore yuan (CNY) exchange rate has strengthened a little, but the offshore renminbi (CNH) has fallen further. The gap has expanded to over 1000 basis points. The market consensus for a downward movement of the renminbi remains unchanged.

Given this, attempts to boost the stock market by tweaking the renminbi exchange rate won’t yield much result.

While brokers are mostly optimistic about market prospects, there’s limited room for key indexes to move up. We can see only a “slow bull market” at best.

Companies that benefit from government policies and show good financial results will outperform.

Investors should avoid index-tracking ETF products and invest only in select quality companies. Risk management is key amid the present market situation.

In the medium term, as pension funds will likely buy into blue chips and privately-owned growth companies, investors are advised to build positions in such stocks — but only at the appropriate price.

This article appeared in the Hong Kong Economic Journal on Jan. 6.

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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