28 October 2016
China’s stock markets are still very fragile, and any bad news could lead to a sell-off. Photo: CNSA
China’s stock markets are still very fragile, and any bad news could lead to a sell-off. Photo: CNSA

Supply-side reform will dominate market in short term

State-owned China Central Television asked me 11 questions in a recent interview.

These questions cover the markets’ focus on China’s economy and capital markets.

1. US treasuries have risen steadily recently. What factors will affect their performance in the future?

2. Global prices of gold and crude oil have fluctuated sharply in recent weeks. How do you expect them to perform in the future?

3. Global financial markets were very volatile around the Lunar New Year holiday, and investors are closely watching the US Federal Reserve. Meanwhile, central banks in Japan and Europe are further expanding their monetary easing measures. What does the divergent stance of central banks mean?

4. How do you expect the renminbi to move in the future? How will that affect A shares?

5. How do you see China’s macroeconomic situation in 2016?

6. Reform is a key word this year, and investors are focusing on the launch and implementation of a registration system for initial public offerings. How will the resumption of IPOs and the introduction of a new third board and a strategic emerging board affect the market this year?

7. China’s A shares have shown signs of recovery after the last correction. What are the reasons behind the recent market rally?

8. Most believe the recent market uptick is just a technical rebound after the market became oversold. Do you agree with that conclusion? Both benchmark indices and the growth enterprise board have posted gains this month. Are you bullish on the market?

9. Some investors would go for small- and medium-cap or policy-driven stocks. From the perspective of institutional investors, what are the investment themes and strategy?

10. Should investors place bets on stocks with good short-term prospects or select stocks with good growth potential for medium- and long-term investment?

11. Investors are usually more conservative in a bear market. Which sectors are safer?
How should investors pick stocks of firms based on their annual results?

Last week, there were clear signs of profit taking in A shares following the considerable rally in recent weeks.

Cyclical sectors like coal, non-ferrous metals, steel, cement and banks performed well, while the internet, pharmaceutical equipment, software development and entertainment sectors led the market fall.

I believe cyclical sectors will continue to outperform ahead of the annual “Two Sessions” (meetings in Beijing of the National People’s Congress and the Chinese People’s Political Consultative Conference), as the market is concentrating on supply-side reform and low-priced stocks of state-owned enterprises.

Meanwhile, investors are avoiding small-cap stocks, especially those of startups.

A shares posted a deep correction on Thursday last week, ending a three-day rally.

The Shanghai market fell sharply, by 6.41 percent, while the Shenzhen market tumbled by 7.34 percent.

And around 1,000 stocks touched the daily down limit of 10 percent that day.

The market sell-off reportedly came amid rumors of tighter liquidity and concern that planned IPO reforms will lead to an increased supply of small-company shares.

China’s top securities regulator denied speculation the new registration system will begin with the ChiNext small-cap board.

Nevertheless, it shows that China’s stock markets are still very fragile, and any bad news could lead to a sell-off.

And investors will take profit quickly given the weak market sentiment.

Central bank governor Zhou Xiaochuan said at the Group of 20 summit that there’s no basis for continued yuan depreciation.

The government will continue its prudent macro policy, and it still has room and tools in its monetary policy, Zhou said.

China will adopt a more active fiscal policy in expanding its deficits.

The economic fundamentals are healthy given that economic structure and quality are improving.

This article appeared in the Hong Kong Economic Journal on Feb. 29.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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