Across The Border
by

President Xi’s July 1st speech, and the analysis that followed, helped boost China stocks this week

An apparent commitment to fostering a healthy and stable market has helped to win back investor confidence

PUBLISHED : Thursday, 07 July, 2016, 5:13pm
UPDATED : Thursday, 07 July, 2016, 10:41pm

A vague policy statement from China’s securities regulator may have been a catalyst for a 2.9 per cent rally in mainland shares earlier this week.

On Monday, the China Securities Regulatory Commission (CSRC) published a statement saying that senior officials had reached a consensus to align with policies of the current leadership to develop the mainland’s capital market following an analysis of President Xi Jinping’s speech made on July 1.

The statement contained little substance while touting the instructions by the president as something with far-reaching significance. Xi’s speech on July 1 was addressed to hundreds of elite cadres during a ceremony to commemorate the Communist Party’s 95th anniversary.The CSRC studied the speech over a two-day period ending Monday.

The benchmark Shanghai Composite Index rebounded 1.9 per cent on Monday, reflecting its largest single-day rise in two months.

On Tuesday, the main gauge advanced another 0.6 per cent to 3,006.39, the first time it closed above the psychologically important 3,000-point level since April 19.

The index continued its advance on Wednesday, edging up 0.36 per cent to 3,017.29.

The cumulative 2.5 per cent rally, in spite of an overall weak market, was seen as a positive sign of a recovery in investors’ sentiment, which was severely impacted in the market rout last year that wiped out as much as US$5 trillion of capitalisation.

The CSRC said in the statement that officials would make a combined effort to regulate the market. They added that the healthy and stable growth of the mainland stock market would be a priority.

Shanghai Shiva Investment Hedge Fund Manager Zhou Ling said it was common for the markets to respond favourably to political statements reassuring investors of the government’s commitment to markets.

“It is nothing unusual that political power could move the mainland market,” Zhou said. “Investors took a cue from the regulator’s statement that they would do anything to maintain stability or avoid another sharp fall.”

Between October 2014 and mid-June 2015, the A-share market jumped more than 100 per cent amid Beijing’s calls to effectively use fundraising on the two stock exchanges to underpin the real economy.

Margin financing backed by shadow lending, without regulatory oversight, helped send about 2 trillion yuan of funds into A shares through unofficial channels. Meanwhile, the official margin trading businesses operated by the mainland’s brokerages also totalled 2 trillion yuan amid the market boom.

On the mainland, borrowing funds from the shadow banking system such as online peer-to-peer (P2P) platforms or illegally-run underground banks to fund share purchases are prohibited. However, the CSRC didn’t launch an enforcement action against the practise, and was instead dismissive of warnings about the risks if the leverage buying spun out of control.

At that time, rising stock prices, despite showing signs of bubble, was well received by regulatory officials. Even state-owned media said the rally was supported by the country’s economic reforms which would generate massive dividends in future.

Meanwhile, the Communist Party’s grip on the economy could still play a decisive role in shoring up share prices, analysts said.

But they cautioned that fundamentals wouldn’t be enough to support a rally.

“As they face the task of ensuring market stability, regulators won’t implement any drastic moves in the coming few months,” said a source close to the CSRC.

Analysts said that small technology companies would still be favoured by speculative investors as China’s leadership has advocated technological innovation to sustain the mainland’s economic growth.

To bolster market stability, the CSRC led by chairman Liu Shiyu, has launched a campaign to expel unqualified initial public offering applicants.

A more thorough review process could force hundreds of companies to voluntarily withdraw their share listing applications, which could help soothe investors’ fears about a potential equity influx that would dilute existing holdings.

About 800 applications are pending on behalf of companies seeking to float new shares on the Shanghai and Shenzhen stock exchanges.