Date
20 October 2017
The Shanghai Composite Index fell by 2.47 percent Monday while the Shenzhen Composite Index and the ChiNext tumbled 4.51 percent and 5.5 percent, respectively. Photo: CNSA
The Shanghai Composite Index fell by 2.47 percent Monday while the Shenzhen Composite Index and the ChiNext tumbled 4.51 percent and 5.5 percent, respectively. Photo: CNSA

Why A shares’ recent sell-off is not justified

China’s A shares suffered a heavy sell-off on Monday. Shanghai and Shenzhen slumped 2.47 percent and 4.51 percent, respectively.

The reason might be that last week, the party’s politburo conference did not say much about stabilizing growth as one of its key “economic work tasks” for 2017.

That stoked market concerns that Chinese authorities might reduce the economic stimulus.

The politburo meeting is usually held every quarter — in April, July, October and December. The December meeting usually sets the tone for economic policy direction for the following year.

It’s viewed as a prelude to the annual Central Economic Work Conference which will be held next week.

The top policymakers mentioned stabilizing growth once this time, compared with four times in October, according to a report by the official Xinhua news agency.

This indicates that the central government is getting more confident that the economic slowdown has stabilized.

In fact, recently, almost all economic data have exceeded market expectations. For example, the official manufacturing Purchasing Managers’ Index rose to 51.7 in November, the highest in more than two years.

Also, exports expanded 5.9 percent in November from the year before, outstripping market expectations.

Profit growth in China’s large industrial firms accelerated to 8.4 percent in the first 10 months, reversing a 2 percent drop in the same period last year.

That reflected revived manufacturing sector growth. As a leading indicator, the producer-price index saw its gain accelerate to 3.3 percent in November from a 1.2 percent rise in the previous month, a five-year high.

That has assured Beijing that its efforts in stabilizing growth through monetary easing, capacity elimination and infrastructure spending have paid off. Improving growth in Europe and the US also helped.

The politburo meeting may have sent a strong signal that Beijing may hold back from massive economic stimulus next year, triggering a heavy sell-off in A shares Monday.

Nevertheless, if China’s economy has begun to stabilize after nearly four years of slowdown, company earnings would improve. That should boost the medium- term outlook of stocks.

Cyclical sectors like exports, shipping and resources should benefit greatly and may stage a rebound. Blue chips are also expected to do well.

This article appeared in the Hong Kong Economic Journal on Dec. 13

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Hong Kong Economic Journal columnist

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