Waltzing to the Chinese bull market
Tuesday, June 09, 2015
Three years ago when I was on my trading desk in Hong Kong, the
Shanghai Stock Exchange Composite Index (SSE) breached the iconic 2,000 points
support level for the first time since 2009 and everyone thought a bear market
for the Chinese equity market had emerged. Until about a year ago, that
statement remained valid only to be surprised by a series of measures that
transformed the equity market landscape in China.
Headline phrases that previously read searches for the bottom are now saying clinches fresh seven-year peaks and this is no wonder as the SSE
outperformed all major indices worldwide to achieve a remarkable year-to-date
(ytd) performance with a return of 42.8% as of end May 2015. Similarly, the
return on Shenzhen Stock Exchange Composite Index (SZSE) ytd almost doubled at
97.8%. To put things in perspective, China’s closest neighbour, Hong Kong’s
Hang Seng Index (HSI) recorded 17.2% returns while Dow Jones Industrial Average
(DJI) and S&P 500 Index (S&P500) managed just 1.1% and 3.2% returns
respectively over the same period.
Many would agree that the Chinese market remains weighed by the
property downturn due to cooling measures enforced by the government, factory
overcapacity due to weak export demand and escalating local debt. With
softening growth in China’s economy as GDP growth is estimated at just 7% for
2015, market expectations are high
that the central bank will further implement both monetary and fiscal
easing measures to drive growth.
Further to easing expectations that fuel the rally in Chinese
equities, there are more tangible developments. The People’s Bank of China lowered the reserve requirement ratio (RRR)
by 100 basis points to 18.5% in April 2015. Additional RRR cuts were applied to
financial institutions that are supporting the agriculture sector as well as
small and medium businesses. While a RRR cut falls within expectations, the
magnitude of the reduction surprised the market as it reinforced the central
bank’s policy priority in supporting
economic growth and more importantly to boost liquidity.
In addition, the market expects further reform announcements on state-owned enterprise (SOE) this
year. As SOEs account for around 60-80% of the A-Share and H-Share indices, any
positive reforms would serve as a catalyst
for re-rating in SOEs.
Particularly for the A-Share market, the launch of the Shanghai-Hong Kong Stock Connect in November 2014
exposed the largely domestically driven China A-Share globally. With growing
expectations of Shenzhen-Hong Kong Stock Connect and even MSCI to possibly
include China A Shares in its upcoming annual market classification review, SSE
and SZSE will most likely attract more fund
inflows.
Dominated by onshore retail
investors, the Chinese A-Share market may continue to see greater optimism
despite regulatory changes on leverage and short-selling to curb rising margin
debt. This is largely due to asset rotation
by these retail investors who have grown increasingly cautious about real
estate, wealth management products and bank deposit, hence developing a
penchant for the equity market.
With the SSE trading at 7-year high of 5,131 points at point of
writing, it may not be too long till we waltz to an all-time high of 5,903
points set in 2007.
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