Mainland China investors pin hopes on fund influx to shore up stock prices

Mainlanders count on arrival of 300b yuan on the through train to boost shares but bleak profit outlook remains a concern

PUBLISHED : Monday, 01 September, 2014, 4:21am
UPDATED : Monday, 01 September, 2014, 4:21am

Mainland investors have pinned their hopes on a fund influx of as much as 300 billion yuan (HK$377.8 billion) into A shares, courtesy of the stock through train scheme with Hong Kong, to help up shore up their battered portfolios.

However, a bleak corporate earnings outlook amid a weaker mainland economy remains the biggest drag on the Shanghai Composite Index, which has been among the world's worst-performing benchmarks since 2010.

During the first half of this year, mainland-listed companies reported overall year-on-year profit growth of 9.5 per cent, slowing from the full-year earnings growth of 14.2 per cent in 2013.

Last year, the Shanghai equity benchmark lost 6.75 per cent. Having seen red for yet another year, retail investors on the mainland have come to take it for granted that an influx of capital will drive up stock prices.

The through train scheme linking the Shanghai and Hong Kong stock exchanges, with its eagerly awaited launch likely next month, will funnel funds up to a cap of 300 billion yuan a year into the market for the direct purchase of A shares.

Since the scheme was announced on April 10, the Shanghai Composite Index has advanced 5.3 per cent. Mainland investors see plenty of reasons to flag their faith in the programme, as the A shares of dual-listed firms are now trading at a discount of nearly 7 per cent to their H-share counterparts.

Buying interest in A shares from Hong Kong investors is believed to be high, based on more than 900 billion yuan worth of deposits in Hong Kong, the dominant offshore centre for yuan trading.

Moreover, the China Securities Regulatory Commission controls the pace of initial public offerings to curb fresh equity supply, allowing only 100 firms to raise funds on the Shanghai and Shenzhen stock exchanges in the second half of this year.

UBS analyst Chen Li cautions investors that the optimism has been overdone.

"The through train scheme will not have any impact on fundamentals," he said.

"It will be the economic conditions, macroeconomic policy directions and corporate earnings that will play a decisive role in the performance of the stock market."

UBS predicts the mainland's gross domestic product growth will slow from an expected 7.5 per cent this year to 6.8 per cent in 2015, with company earnings remaining lacklustre.

The State Council, under Premier Li Keqiang, is adamant on the need to curb financial risks arising from the shadow banking system, standing firm on tightening monetary policies at the expense of economic output.

Slowing expansion in the mainland economy and sluggish growth in corporate earnings could also dent overseas investors' appetite for A shares, at least temporarily.

Based on the qualified foreign institutional investor and the renminbi qualified foreign institutional investor schemes, foreign investors were estimated to have used only half of the total quota to buy mainland equities, UBS said. The programmes were introduced by Beijing to direct funds from select overseas institutions into A shares.

Unlike mainland investors, who like to chase short-term gains by speculating on small-cap stocks, foreign players would make investment decisions based on valuation. They are seen as likely to opt for blue chips and will increase their holdings only after being convinced of the earnings potential of the target companies.

"Mainland investors would take it for granted that some policy changes are used by the government to stimulate the market," Shenyin Wanguo Securities analyst Gui Haoming said. "Even if the short-term buying craze from retail investors were to send a boost to the market, a correction would follow in future."

The brokerage forecast the Shanghai benchmark, which closed at 2,217.2 points on Friday, would drop 12 per cent to as low as 1,950 points in the coming weeks.