21 October 2016
Provincial governments in China have taken measures to support the property market. Photo: Bloomberg
Provincial governments in China have taken measures to support the property market. Photo: Bloomberg

Why China stocks may hold up well for a while

The renminbi has stabilized a bit following the Lunar New Year holiday, moving in the 6.52 to 6.55 range against the US dollar.

The spread between the onshore and offshore rates has also narrowed, sometimes to virtually nil.

Everyone is keeping an eye on the trend of the currency exchange rate, given that any big change in the rate would cause volatility in prices of other assets.

As of now, the correlation between a stable exchange rate and favorable stock market performance is quite high.

As spring is arriving in the northern hemisphere, it seems that global asset markets are getting warmer too.

Governments have used whatever tools they have, both monetary and fiscal, to try to stabilize the markets.

China’s economy, meanwhile, continues to face many challenges.

Data released this week showed the manufacturing purchasing managers’ index for February at 49, the weakest reading since 2011.

In other news, Moody’s has downgraded the outlook on China government bond ratings to negative from stable, citing several factors.

The reasons for the outlook revision include large and rising contingent liabilities for the sovereign, a marked fall in reserve buffers due to capital outflows, and increased policy challenges to achieve reforms and robust growth while preserving economic and financial stability, the rating agency said.

If the Moody’s statement had come a month ago, it would have caused huge stress to the stock markets.

But now, the markets have taken the news in stride. On Wednesday, benchmark indexes in both Shanghai and Hong Kong rebounded notably.

The reason lies in policies.

The Chinese central bank lowered bank reserve requirement ratios last weekend, freeing up about 700 billion yuan of funds into the system.

Meanwhile, major mainland provinces are lowering the down-payment ratios for home purchases and offering tax incentives, among other measures, to destock the real-estate market.

One provincial government is even reported to be offering “zero down-payment” facility for new collage graduates.

Sometimes it’s right to just follow the trend, even if it might seem irrational.

Share prices of mainland developers and oil giants bounced strongly on Wednesday despite weak fundamentals.

As National People’s Congress meetings are about to begin, the markets’ good performance yesterday reflects hopes for new stimulus measures from Beijing.

Investors should perhaps put aside fundamental analysis for the moment and enjoy the ride.

This article appeared in the Hong Kong Economic Journal on March 3.

Translation by Myssie You

[Chinese version中文版]

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head of private banking and trust services at Hang Seng Bank

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