China’s A shares rallied 5.6 percent on Monday on the back of seemingly neutral comments from Chinese President Xi Jinping. The market turnover hit a three-year high.
Last Friday, Xi talked about supply-side structural reform in financial sector in a high profile manner. His speech was taken as a bullish signal almost immediately.
In his speech, Xi stressed that finance is a core competitiveness of a nation. China should build a regulated, transparent, open, dynamic and resilient capital market, the president said.
If the finance sector is strong, the economy will be strong, Xi added.
He also highlighted the need to prevent and mitigate systemic financial risks.
While it’s not apparent how the Xi speech can be taken as a suggestion that the equity market should go up, if that’s the way investors want to interpret the remarks, one cannot argue with that.
That said, one must acknowledge that recent developments have, indeed, been supportive of a stronger market.
Chinese authorities have unveiled a string of measures since late last year.
The government has revised rules to encourage insurance companies to invest in equities, and eased financing rules for brokerage firms. Moreover, officials of China’s top financial regulators, including the People’s Bank of China and the China Securities Regulatory Commission, have all talked up domestic equities either in an explicit or implicit way.
The authority’s pledged support for private enterprises, the US Federal Reserve’s shift to a more dovish monetary stance, and the progress in US-China trade talks have all helped.
Valuation of A shares was close to historical low after the slump last year, a factor that also laid a foundation for recovery.
That said, bull cycles of China A shares are typically short-lived. The question now is this: Will the latest market rally sustain, or will it end up in another collapse like what we have seen in 2015?. And what sort of investment themes would help the bull market last longer?
Well, there are two key things. The first is reform and the other is asset allocation.
Beijing is pushing forward market reforms against the backdrop of trade tensions with the US. That may bring new growth momentum and revitalize the economy.
Traditionally, Chinese households keep most of their wealth in the housing market. Financial assets only account for 10 percent, compared to 60 percent in western countries. If that portion goes up by, say, 5 percentage points, that would provide a strong boost to Chinese equities.
This article appeared in the Hong Kong Economic Journal on Feb 26
Translation by Julie Zhu
[Chinese version 中文版]
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