China plays on the rise

After years of flat to negative performance, mainland stocks may be finally embarking on a rally, having rebounded strongly from their lows in March

PUBLISHED : Monday, 04 August, 2014, 3:40am
UPDATED : Monday, 04 August, 2014, 4:47am

Mainland stocks are on an upswing. The CSI 300 index is up 12 per cent since its year-low in March while the H-share index has gained 20 per cent over the same period.

The Hang Seng Index has broken out of its 21,000-23,000 range - where it has traded most of the past five years - and was close to breaching the 25,000-point barrier last week, having closed at 24,532.43.

Veteran investors are used to such swings and are inclined to discount them. But there are reasons to think maybe this time it is different - a genuine rally may finally be under way following five years of flat to negative performance.

The main reason is the anticipation of the through train scheme that will let Hongkongers buy A shares on the Shanghai exchange and mainland investors buy Hong Kong-listed equities for the first time.

The plan will begin in October but has already resulted in funds pouring into H shares as investors expect them to trade in line with valuations of their counterparts in Shanghai.

There are also signs that the mainland's slowing economic growth may be ending. HSBC recently revised its growth projection for the mainland to 7.5 per cent from 7.4 per cent.

Data for the mainland's purchasing managers' index has been signalling expansion since June, according to HSBC.

PMI is a widely watched leading indicator of the direction of the economy, and consecutive declines in the mainland PMI last year punished the market.

"The mood has improved. Investors were underweight on China for a long time, but that has been shifting," said Sam Rhee, a co-head of Asian equity at Morgan Stanley Investment Management.

The mainland equities market has for years followed a pattern where share prices drop at the beginning of the year as the authorities put brakes on the economy, only to rebound as government policies are reversed at mid-year.

That seems to be the trend too this year as the government rolled out mini-stimulus measures during the first half to address economic weakness.

The People's Bank of China is providing liquidity through a new instrument called pledged supplementary lending, which pushes banks to support socially worthy projects.

The central bank supplied one trillion yuan (HK$1.25 trillion) to the China Development Bank in April, which JP Morgan estimated was equivalent to a 1 per cent cut in the bank's reserve requirement ratio.

The policy move is significant, with analysts dubbing it as a "mini QE", with reference to quantitative easing, saying this could translate into a meaningful recapitalisation of mainland banks.

Erwin Sanft, the head of China and Hong Kong equity research at Standard Chartered, said the authorities had also directed banks to open up credit to property developers and local governments.

"The first four months were terrible for the property market, and that's the base for a lot of local government funding vehicles. That turned around in May when there was guidance to banks to provide support to local government platforms and directly to developers," Sanft said.

Bank lending rose 29 per cent in June from a year earlier, according to Standard Chartered.

This comes on top of extra spending by Beijing on favoured sectors, such as railways, social housing and environmental works.

For those looking for a reason to buy China equities, which are undervalued by almost all historical measures, it is a reason for optimism.