China stock market

China’s stock rebound may be déjà vu but unsustainable, says top strategist

The Shanghai Composite Index surged 4.3pc last week, posting its best performance for the five-day period in two years

PUBLISHED : Tuesday, 25 September, 2018, 11:33am
UPDATED : Tuesday, 25 September, 2018, 9:31pm

Investors may find buying into the ongoing rebound of Chinese stocks a tricky game.

As many of them, taken by surprise of the sudden rally, lament that they have not jumped onto the bandwagon quick enough, the strategist from the investment banking unit of Bank of Communications who correctly predicted a crash on Chinese equities in 2015, has warned the rebound could be short-lived.

The buying began gathering pace last week after the Shanghai Composite Index, the worst performer among the world’s major benchmarks, touched a four-year low. For the week, the gauge jumped 4.3 per cent for the biggest gain for the five-day period since March 2016, with turnovers also climbing to decent levels.

While there was no major immediate catalyst that would have fuelled the gains, Sinolink Securities said the US’ announcement of tariffs on US$200 billion of Chinese imports put a pause to further escalation of the US-China trade war, taking some pressure off the equity market that has been clouded by the trade dispute and China’s deleveraging this year.

“It’s a technical rebound,” said Hong Hao, head of research at Bocom International Holdings in Hong Kong. “Previously the market has been oversold. But fundamental issues remain, such as the trade war, the slowdown and the coming US midterm election.”

The Shanghai Composite had already slumped by as much as 20 per cent this year. It slipped 0.6 per cent to 2,781.14 on Tuesday, as the market reopened after being shut for a public holiday a day earlier. Consumer-staples stocks have led the pack since the start of the rebound, with liquor giant Kweichow Moutai and Jiangsu Yanghe Brewery Joint-Stock rising at least 7.9 per cent over the past week.

Previously the market has been oversold. But fundamental issues remain, such as the trade war, the slowdown and the coming US midterm election
Hong Hao, Bocom International Holdings

Still, bulls from some brokerages and the state media that have repeatedly touted the buying opportunity for Chinese stocks this year are remaining quiet, giving no indication of whether the market has or has not bottomed. The boldest forecast has so far come from Sinolink Securities, which predicted the Shanghai Composite to rise to as high as 2,900 and the rebound would sustain throughout October.

A similar bounce was also seen in July, when stocks rallied right after the Trump administration announced to slap an initial levy on US$34 billion of Chinese goods. The rebound lasted three weeks and drove the Shanghai Composite up by 6.3 per cent before faltering.

If the bounce this time was of the same magnitude, the index would rise to 2,818.86, representing only a mere 1.4 per cent gain from Tuesday’s close.

The US tariff imposition could chip away as much as 0.44 percentage points from China’s economic growth, and the trade surplus against the US might decrease by as much as 20 per cent, according to projections by Citic Securities.

“The 3,000-point level will probably be as much as the rebound can go,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “The impact of the trade war is likely to be felt in the upcoming third-quarter corporate earnings.”