19 November 2018
Jawboning by senior officials and a loosening of policies suggest the bull in China stocks will soon be back. Photo: Bloomberg
Jawboning by senior officials and a loosening of policies suggest the bull in China stocks will soon be back. Photo: Bloomberg

China is ready for another bull market

It’s said that, for mainland investors, three days of a market rally would change even their religion.

They would jump onto the bandwagon; even the most pessimistic of investors would change their stance.

In fact, the Shanghai Composite Index posted a three-day rally in the last three sessions, up 1.2 percent, 1.7 percent and 2.2 percent, respectively.

And many investors have already wiped away the bitter memory of last summer’s market collapse.

The Shanghai and Shenzhen markets rose 2.2 percent and 2.6 percent, respectively, on Monday. The Growth Enterprise Board gained 2.3 percent.

And the market turnover in Shanghai and Shenzhen hit a new high of over 900 billion yuan (US$138.5 billion).

This market rally started March 11, or before the “Super Saturday” news conference at the end of the annual “two sessions” political conferences in Beijing.

The Shanghai market rallied for seven straight days.

Central bank governor Zhou Xiaochuan and Liu Shiyu, the new chairman of the China Securities Regulatory Commission, held news conferences March 12.

Both cheered up investors by offering good news for the market.

Zhou promised that the renminbi would be kept steady and the government would adopt a flexible monetary policy in response to external shocks.

And Liu pledged that the registration system for initial public offerings won’t be launched soon and that the government won’t pull its bail-out fund out of the stock markets any time soon. Also, he promised to launch Shenzhen-Hong Kong Stock Connect this year.

In addition, Beijing has seemingly changed its stance toward developing the stock markets.

The long-awaited launch of a strategic emerging industry board on the Shanghai Stock Exchange is now in question after the mention of the proposed launch was removed from a draft outline of the 13th Five-year Plan.

On March 18, China Securities Finance Corp. Ltd., the country’s flagship market rescue fund, said it would resume five relending facilities and slash the interest rates for them. For example, the most popular 182-day relending rate has been cut to 3 percent from 4.8 percent.

China Securities Finance lends money to brokerages, who then lend money to their customers for margin trading of stocks. So, a lower relending rate enables individual investors to obtain cheaper funds for margin trading.

It’s a sign that the authorities have adopted a U-turn in their stance toward leverage. They’ve been discouraging the use of margin trading since last summer’s crash.

Also, Vice Premier Zhang Gaoli indicated at a summit on Sunday that China’s economy will perform well in the first quarter of this year.

His remarks reveal that China’s economic data improved markedly this month after disappointing in the first two months.

Zhou said at the same summit that China’s stock market is still underdeveloped given the country’s high savings rate.

And the authorities intend to guide more savings into the equity markets by developing capital markets during the 13th Five-year Plan.

It seems that China’s economy has bottomed out.

Capital supply, policy and real economy are all well positioned for another bull market run.

Nevertheless, Beijing should have learnt a good lesson from the frenetic market rally last year.

The government will prefer to maintain a market rally that gains steam gradually.

This article appeared in the Hong Kong Economic Journal on March 22.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal columnist

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