China stock market

China’s state media talks up stock market as most accurate strategist says it’s not time to buy

Financial and securities newspapers have drawn on data – stock valuations, corporate earnings growth and share buy-backs, to shore up the market

PUBLISHED : Wednesday, 04 July, 2018, 2:02pm
UPDATED : Wednesday, 04 July, 2018, 3:23pm

China’s state media is in full gear to shore up the nation’s stock market after a rout wiped out almost US$2 trillion in market value, compounding a call by one of the nation’s most accurate strategists that the sell-off still has room to run.

The Xinhua News Agency ran an article on Wednesday reassuring investors that the valuations of Chinese stocks are already close to the historical low levels, while major financial newspapers controlled by Xinhua and People’s Daily published stories this week calling the ongoing declines irrational and overdone, and that signs of market bottoms are building up.

Even so, Hong Hao, Hong Kong-based managing director at Bocom International Holdings who correctly predicted the bubble bursting on mainland Chinese stocks three years ago, disagreed. He said the turnover velocity, a gauge measuring how fast shares change hand, still remained at elevated levels, indicating that the bulls have not fully capitulated, and the risk of forced liquidation of pledged stocks is lurking.

China’s state-controlled media has a long-standing history of talking up or down markets in shake-outs, which have compelled some investors to carefully read between the lines of these articles for signs of what and how top policymakers will support or rein in stocks.

With the undertone to arrest further declines, China Securities Journal and three other major securities newspapers have also drawn on data and facts – battered valuations of China’s stocks, corporate earnings growth and executives’ increased stock buy-backs in the secondary market, to shore up the market.

“The markets are signalling characteristics of a bottoming out,” the Shanghai Securities News said in an article on Tuesday. “It is the seed-sowing stage. With quality core assets in hand, time will be your friend as the probability of outperforming the market is in the future.”

Investors aren’t convinced, at least for now. The Shanghai Composite Index continued its downward spiral on Wednesday trading, dropping 1 per cent at the close after a brief rebound in the previous session on Tuesday. The decline has taken the gauge down by 17 per cent this year, making it the worst performer among the world’s major stock markets.

It is still too early to catch falling knives, as there will be further selling for structural liquidity reasons, from anywhere
Hong Hao, Bocom International Holdings

Traders have their eyes fixed on July 6, when the White House is set to implement US$34 billion of tariffs on imports of Chinese goods. Beijing is preparing to fight back with equivalent retaliatory measures if the duties come into effect as planned, elevating the current verbal conflict between the world’s two largest economies into a real trade war.

The Shanghai Composite is still in the oversold territory technically, with the 14-day relative strength index below 30, and its price-to-earnings multiple is already lower than the aftermath of the 2015 crash.

To Bocom International’s Hong, these are not signals to buy stocks.

“It is still too early to catch falling knives, as there will be further selling for structural liquidity reasons, from anywhere,” he said. “At times like these, technical rebounds will be fleeting, and investors should hold out for better entry points later.”