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Shanghai’s benchmark stock index could fall to 2,500

Economy may stabilise at a lower level but structural problems remain

PUBLISHED : Sunday, 17 January, 2016, 4:44pm
UPDATED : Monday, 18 January, 2016, 9:32am

The mainland stock markets have arrived at fair value after two weeks of an intense sell-off, but indices could drop further, analysts said, even though recent economic data hinted at a mild recovery.

The A-share benchmark Shanghai Composite Index closed at 2,900.97 on Friday and has plunged 18.03 per cent from its level at the end of last year, when it was at 3,539.18.

Hong Hao, chief strategist at Bocom International, said the index had “reached our fair trading value of 2,900”, but investors, both at home and abroad, were betting on another crash for better buying opportunities.

“From the intense response we have received from investors who appear to be keen to pounce on Shanghai’s great fall, the market has not reached the stage of revulsion,” Hong said. “The close parallel with the NASDAQ bubble suggests that China can indeed fall further to 2,500, after a technical reprieve.”

On the other hand, regulators have kept trying to prop up the markets and restore investors’ confidence after the abrupt installation and scrapping of a poorly designed circuit breaker triggered a stampede and accelerated market falls during the first trading week of the year.

The Shanghai and Shenzhen bourses both issued announcements late on Wednesday night saying they would closely monitor any major selling that might disturb the “normal trade order on the A-share market”, and urging major shareholders who plan to sell stocks in companies to strictly follow an earlier rule issued by the China Securities Regulatory Commission limiting such sales.

The People’s Bank of China injected hundreds of billions of yuan into the interbank market through the mid-term lending facility and seven-day reverse-repo agreements in open-market operations last week.

“Liquidity is ample in the market, which brings down the chance for more cuts in interest rates or the required reserve ratio in the near term,” Hong said. “But even if the central bank decides to pump in more money, it will give limited support to the stock markets.”

Judy Chang, chief investment officer at CIFM Asset Management, said: “The Chinese government will be keen to maintain an at least mild bull market, to prepare favourable conditions for kicking off the registration-based initial public offering reform.”

The CSRC is set to unveil detailed rules for a registration-based IPO system in March, which may accelerate the supply of new shares and drain liquidity from the market, analysts said.

Chang said there were some signs of the economy stabilising recently, and China’s economy was likely to bottom out and pick up in the second quarter as the fiscal stimulus package starts to take effect.

The export figures published by the central government on Wednesday largely beat expectations, and some economists said they suggested the beginning of a modest improvement in trade, partly helped by a weaker currency.

Meanwhile, credit expanded significantly in December, with aggregate financing surging to 1.82 trillion yuan from 1.02 trillion yuan in November, much stronger than expected.

Nomura said in a note on Friday that “the December credit data were consistent with trade data and leading indicators, suggesting the economy may have stabilised at a low level”.

“However, we think this stabilisation will be only temporary, as headwinds remain strong on structural problems like overcapacity and oversupply in the real estate market,” it said.

Weighed down by poor sentiment, Hong Kong’s benchmark Hang Seng Index closed at 19,520.77 last week, lingering around the lowest level in three years, after declining 4.56 per cent for the week. The H-share Index, tracking mainland-based companies, dropped to 8,236.28, the lowest level in more than five years, after plunging 6.89 per cent for the week.