Caixin
Jul 07, 2020 08:56 PM
FINANCE

Experts Debate Whether China’s Stock Bull Will Keep Running

As regulators have tightened their grip on financial institutions’ risky off-balance-sheet assets, the institutions have opted to invest more in stocks, an analyst said.
As regulators have tightened their grip on financial institutions’ risky off-balance-sheet assets, the institutions have opted to invest more in stocks, an analyst said.

As China’s stock market has rallied into a bull market and the benchmark index has risen for the sixth straight trading day, investors are rushing to open trading accounts even as analysts warn of headwinds facing the market.

The benchmark Shanghai Composite Index closed up 0.37% on Tuesday, after entering a technical bull market the previous day. Liquidity remained abundant as the combined daily turnover on the Shanghai and Shenzhen stock exchanges reached 1.74 trillion yuan ($248.1 billion), topping 1 trillion yuan for the fourth trading day in a row.

Stock chart 1

Loose monetary conditions in China and other major economies is a key reason behind the recent rally, analysts said, as many policymakers across the world have relaxed monetary policy to try to offset the fallout from the Covid-19 pandemic.

Domestic investors have gained a stronger stomach for risk lately as China has become one of the first countries to get its epidemic under control and get large swaths of its economy up and running again. Overseas investors have also showed greater interest in the Chinese mainland market as the flood of liquidity from central banks abroad has fueled their mainland share purchases through Hong Kong’s stock links.

Stock chart 2

“In the second half of the year, monetary policy will remain loose in order to prevent large-scale issuance of treasury bonds and local governments’ special-purpose bonds from crowding out private sector financing,” Zhang Ming, a researcher at state-backed think tank the Chinese Academy of Social Sciences, said in an opinion piece (link in Chinese). Zhang added that the expectation of sustained monetary easing would help advance the bull market.

Analysts said another factor behind the market rally is that investors have begun to shift money to stocks from other investments subject to tighter regulatory oversight or suffering from lower returns. As regulators have moved to ban financial institutions from promising guaranteed yields to investors, the returns on many bank investment products have fallen. “Against the backdrop of the continuous decline in overall returns from banks’ wealth-management products, it looks like there is a lot more value in the equity market,” analysts at Guotai Junan Securities Co. Ltd. said in a note (link in Chinese).

As regulators have tightened their grip on financial institutions’ risky off-balance-sheet assets, the institutions have opted to invest more in stocks, Zhang said.

As to the question of whether the bull market is here to stay, analysts hold different opinions. Some were optimistic because China’s economic recovery is likely to be better than expected and the current loose monetary policy probably won’t change anytime soon. “The A-share market is now benefiting from the best combination of an economic expansion and loose monetary conditions, so there is reason to be moderately optimistic,” Xia Chun, chief economist at financial services provider Noah Holdings Ltd., said in an opinion piece (link in Chinese).

But others warned of risks as economic and financial headwinds still linger. “One of three things could kill the rally: worse-than-expected economic data, policy tightening and a correction in the US market,” economists at Macquarie Group Ltd. said in a note.

Many analysts said that it is unlikely that policymakers will further loosen monetary policy unless there is a large second wave of coronavirus infections. “If the economic recovery grows overheated or if share prices rise too fast — either could cause regulators to tighten liquidity,” researchers at the Suning Institute of Finance said in a note (link in Chinese).

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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