China’s stock benchmark may climb 14 per cent to scale 2015 high as inflation, policy risks ease, Guotai Junan predicts

Shanghai Composite Index may climb to 4,000 points, a level not seen since the market meltdown in 2015, Guotai Junan says in May 23 report
East Money Information, Bank of Jiangsu and Beijing Oriental are among its top picks on potential market re-rating

Shanghai Stock Index

Zhang Shidongin Shanghai

Published: 3:46pm, 24 May 2021

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China’s key stock index will probably break out of sideways trading to scale a level not seen in six years as concerns about inflation and policy tightening risks ease, according to Guotai Junan Securities.

The Shanghai Composite Index may rise to 4,000, a level not seen since the market meltdown in 2015, analysts led by Chen Xianshun at the Shanghai-based brokerage wrote in a report dated May 23. The level implies a 14 per cent upside from Monday’s close, making it among the most bullish calls.

China’s economy may have seen the steepest decline in aggregate financing in April when volume shrank by 45 per cent to 1.85 trillion yuan, they said. Factory-gate prices, which surged 6.8 per cent in April, are likely to decelerate after May. Both improvements could underpin risk appetite and temper worries about central bank policy.

“The risk to risk-free interest rate is likely to be on the downside,” Chen said in the report. “Negative expectations about liquidity will need to be revised as current inflation expectations have already reflected the extreme relationship of supply and demand.”

Investors should buy mid-cap blue-chip stocks ahead of potential market re-rating, they added. East Money Information, Bank of Jiangsu and Beijing Oriental Yuhong Waterproof Technology are among its top recommendations.

Since reaching this year’s high of 3,696.17 on February 19, Chinese stocks have struggled for direction outside a 200-point channel, as domestic economic recovery and a rally in commodity prices stoked inflation. Lingering concerns about an extended crackdown on tech companies also weighed on sentiment.

02:01

China’s economy expands record 18.3 per cent in the first quarter of 2021

The Shanghai Composite has declined 5.7 per cent since February 19, while the S&P 500 has risen 6.4 per cent while the Hang Seng Index has retreated 7.1 per cent in the time. The local index rose 14 per cent in 2020, a second year of advance. It added 0.3 per cent to 3,497.28 at the close on Monday.

Guotai Junan’s view contrasted with the market consensus that China’s central bank will further dial back the ultra-loose policies introduced last year to solidify the economic rebound from the pandemic effects, including a warning by BCA Research last week about the risk of “catching a falling knife.”

Citic Securities, China’s biggest publicly traded brokerage, sees easing pressure on price increases in industrial products after recent rapid gains prompted top policymakers to talk down prices. Stocks will be underpinned by ample liquidity and a pickup in manufacturing investments in the second half, it said.

This article appeared in the South China Morning Post print edition as: Shanghai index ‘may rebound to 2015 high’