Investors look for signs China rally will last
With Shanghai bourse's recent surge, some investors are positioning for a bull market but others are wary of speculative gains driven by liquidity
The mainland's stock markets are at their highest levels since December last year, with a dramatic rally that began a little over a week ago sparking hopes that one of the world's worst-performing equities markets has finally climbed out of the basement.
The question for investors is how long can the rally last, given doubts over the reliability of recent positive economic data released by Beijing.
Some analysts suspect the rally is driven by speculators betting on policy easing in the money and housing markets, rather than confidence in consumer demand.
This year has already seen two, less steep, rallies fizzle out. Some analysts argue this one will prove more durable, even if it is partially fuelled by liquidity.
Low valuations for blue-chip stocks and potential fresh foreign fund inflows have combined with the positive data to set off a rally that they say could hold through the third quarter, and possibly set the stage for a bull market next year.
The Shanghai Composite Index gained nearly 7 per cent in just over a week and is up more than 3.3 per cent since the start of the year. Stocks in mainland companies in Hong Kong have gained about 3.6 per cent.
"There are clear signs that both domestic funds and foreign institutions are building positions in large-cap stocks in Shanghai recently," said Chen Huiqin, a senior analyst at Huatai Securities in Nanjing. "That's because Shanghai market valuations, in particular for index heavyweights such as banks, are really too low … With so many individual hot stocks, you can safely say that the market will stay bullish."
Most large-capitalisation stocks trade at much lower price-earnings valuations than peers in other countries, with banks in particular trading at major discounts.
Brian Ingram, the chief investment officer at Ping An Russell Investment Management in Shanghai, had expected a stock market recovery, but said he had not anticipated the breadth of the rally.
"The fact that cyclical names are starting to improve as well is surprising, and might be seen as a sign that confidence in the economy has improved, which means the rally could last longer," Ingram said.
There are also less positive factors in play, namely a looser money policy that could be pushing speculative cash into equities, and signs that weak economic fundamentals are causing the government to relax curbs on real estate investment.
While positive for stocks in the short run - especially since real estate developers are index heavyweights that can also pull up banking shares - both factors are seen as unsustainable.
"The recent rally of Hong Kong and [mainland] stock markets is pretty much liquidity-driven," said Ben Kwong, a director at KGI Asia.
Economists noted that in addition to steadily opening liquidity taps this year, the People's Bank of China also recently loaded 1 trillion yuan (HK$1.25 trillion) into the China Development Bank to spend upgrading shanty towns.
Ingram saw the liquidity stimulus as part of a government strategy to prop up consumer demand, but he noted that these moves do nothing to address enduring fundamental distortions in credit and real estate markets.
Economists believe a sharp correction in property prices is the biggest threat to the mainland's near-term economic stability, and there are growing doubts it can achieve its target of 7.5 per cent economic growth this year.
As a result, many local governments have begun relaxing curbs on home buying, which analysts say has partly helped the share market recover.
Beijing's efforts, under President Xi Jinping, to put momentum back in its reform agenda has helped sentiment, but, while the central government has pledged to give market forces freer rein in the stock exchanges, change has been limited to incremental tweaks to regulations and crackdowns on insider trading.
The recently announced Hong Kong-Shanghai stock programme, however, may have a greater impact. The scheme would allow two-way investment between the Shanghai and Hong Kong markets under a quota system, and has been hailed by analysts as a potential game changer.
While short-term liquidity generated by the scheme could extend the rally, confidence that economic growth had stabilised was what investors need most, CLSA strategist Francis Cheung said. "Ultimately, the market goes back to the economy," he said.