Why Chinese stocks will continue to trade sideways

November 20, 2015 18:29
A visitor tries a virtual reality handset. Related stocks posted sharp gains after Beijing Baofeng Technology Co. announced two new virtual reality products. Photo: HKEJ

After a two-day correction, the Shanghai Composite Index rose 1.36 percent on Thursday to close at 3,617 points.

Shenzhen stocks advanced 2.65 percent to 12,609.

However, turnover on both markets continued to shrink, this time falling to 859.8 billion yuan (US$134.6 billion).

China’s A shares are likely to trade range-bound in the short term.

The Shanghai market lags Shenzhen in both turnover and share price performance.

For example, turnover in Shanghai on Thursday was 328.4 billion yuan, with about 30 stocks hitting the upper band of the daily trading limit

By contrast, the Shenzhen did 531.4 billion yuan worth of trading. About 120 stocks surged to the daily cap.

The discrepancy is largely due to their stock mix.

The Shanghai market is dominated by large state-owned enterprises (SOEs) which represent the old economy.

Investors have lost interest in these stocks which have yet to reflect progress in an ongoing reform in their earnings.

Meanwhile, the Shenzhen market is populated by innovative private companies that benefit from Beijing’s drive to develop the high-tech industry.

President Xi Jinping has pledged to push “supply side structural reform” and the State Council has unveiled measures to speed up industrial upgrading.

As a result, Shenzhen-listed tech firms have become sought-after targets and the Shenzhen market has also outperformed.

Electronics, media and information technology are the most popular sectors.

Related stocks posted sharp gains after Beijing Baofeng Technology Co. (300431.CN) announced two new virtual reality products, stoking market expectations for more commercial launches.

The news drove related plays to the daily limit, including Lida Optical & Electronic (002189.CN), Tianma Microelectronics Co. (000050.CN) and Hubei Kaile Science & Technology (600260.CN).

Other electronics stocks also posted a run-up such as Wuxi Taiji Industry (600667.CN) and Jiangxi Lianchuang Optoelectronic Science & Technology (600363.CN).

Reports said Beijing is planning to further relax its grip on the property sector.

New housing market rescue measures is expected anytime soon, mainly focused on third and fourth-tier cities with high housing inventory.

The policy is aimed at boosting residential demand by easing funding for property developers.

Thirty-three Chinese cities reported lower new home prices in October and 27 continued to see a price increase, a survey of 70 Chinese cities by the National Statistics Bureau shows.

First and second-tier cities posted slower price growth month-on-month while third-tier cities saw falling prices.

Lower-tier cities have to accelerate destocking to boost their housing market.

It’s widely believed that the second-child policy and urbanization will stimulate the nation’s property market.

However, despite the optimistic outlook, the property sector rose just 0.58 percent on Thursday.

Traditional property developers are far less sexy than tech companies and it’s much harder to speculate on large property firms than small tech counters.

Meanwhile, the Chinese central bank said it would cut the overnight lending rate on its standing lending facility to 2.75 percent from 4.5 percent.

It will also lower the seven-day bank-loan rate to 3.25 percent, from 5.5 percent.

That would reduce the financing costs for companies and bolster the stock market.

This article appeared in the Hong Kong Economic Journal on Nov. 20.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal