Stocks fail to climb on China reform hopes

China's planned policy changes fail to stop sell-off amid fears of an economic slowdown

PUBLISHED : Wednesday, 14 May, 2014, 2:39pm
UPDATED : Monday, 23 June, 2014, 9:28pm

The China reform trade is backfiring in the stock market.

After surging the most in two years on November 18 as the Communist Party unveiled its biggest policy changes since the 1990s, the H-share index has since posted the world's worst drop.

And an index of stocks JP Morgan Chase says benefit most from reform has sunk 10 per cent this year.

A plan to link bourses in Hong Kong and Shanghai, which fuelled a two-month rally when the idea was first floated in 2007, boosted shares for just one day when it was reintroduced in April.

While the November policy package led Goldman Sachs to raise its recommendation on Chinese shares to overweight and spurred Citigroup to predict returns of at least 20 per cent this year, investors have since shifted their focus to the depth of the mainland's economic slowdown.

Instead of boosting stocks, the government's emphasis on reform may impede gains as policymakers downplay the importance of short-term growth, CLSA Asia-Pacific Markets said.

"Pessimism is running high on whatever China does or announces," said David Gaud of Edmond de Rothschild Asset Management in Hong Kong.

Measures such as the exchange link would create a more sustained rally "in any other part of the world", he said.

The competing influences of policy change and the economic slowdown were on display this week, with the Shanghai Composite Index rallying 2.1 per cent on Monday after the State Council said it would deepen capital market reforms, including relaxed limits on foreign investment. The gauge then slid 0.1 per cent on Tuesday as data showed unexpected decelerations in industrial output, investment and retail sales.

Expectations were high in November. Goldman Sachs upgraded China stocks in a November 21 report, saying the Communist Party's pledge to boost private investment in state-controlled industries, protect rural citizens' land rights and ease the one-child policy had "reinvigorated" reform expectations.

However, the mainland's reforms have been overshadowed by poor economic data, the property market slowdown and a depreciating yuan, said Patrick Ho, head of chief investment office research in Hong Kong at UBS Wealth Management.