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Chinese shares in rally mode as delegates prepare for 19th Party Congress

PUBLISHED : Sunday, 08 October, 2017, 8:34pm
UPDATED : Monday, 09 October, 2017, 8:33pm

Equities in Hong Kong and mainland China could be set for further gains in the final trading week before an important twice-a-decade political gathering gets underway in Beijing, extending a bullish run that has lifted regional share indices to multiyear highs.

Hong Kong’s Hang Seng Index jumped 3.3 per cent last week to close at 28,458.04, reflecting its highest level since December 2007. So far this year the benchmark has gained 29 per cent to rank as the best performer among the world’s main equity indexes, according to data from Bloomberg.

Equities traded in Shenzhen and Shanghai are also expected to be upbeat in post-holiday trade on Monday. The mainland share markets were last active on September 29, the final session of trade before the “Golden Week” holiday.

Local equity analysts said momentum remains positive in the fourth quarter.

“The Hang Seng Index is possible to breach above 30,000 this year,” said Ben Kwong, executive director for KGI Asia. “We are already very close [to that level].”

He said the recent rally was mainly due to record highs on Wall Street and a policy boost from Beijing, as the People’s Bank of China recently announced a targeted cut to the amount of reserves banks are required to set aside against loans, effective 2018 – a move seen as helping to boost lending to small business.

The move is also regarded as a boost to investor sentiment ahead of the 19th Communist Party Congress on October 18, when nearly 2,300 party delegates, including senior party members, are expected to meet in Beijing and confirm Chinese President Xi Jinping for his second five-year term as party chief.

Ronald Wan, chief executive officer for Partners Capita said investors were closely watching how the top leadership plan to carry out reforms, especially those in relation to state-owned enterprise (SOE) reform and funding support for small business.

If the “policy bonus” from the congress comes within investors’ expectations, the market may receive a further boost.

“The market is waiting for the answer from Beijing,” Wan said. “Will the top leadership continue, deepen, or change the direction of the reform?”

In particular, specific sectors or companies are likely to benefit more, including energy firms, SOEs approved for mixed ownership reform, and private enterprises allowed to participate in the reform.

If history is any guide, it may be possible to observe a correlation between the stock market and the party congress.

“The Chinese stock market is sensitive to politics,” said Denthur Lee, deputy director for the people's wealth research centre at the Chinese Academy of Social Sciences. “Although it is perhaps never made explicit, the party congress is an influential factor on the market.”

Five party congresses have been held since the mainland equity markets were established in 1990.

In instances when the meetings ushered in a new generation of leaders, such as was the case during 2012, 2002 and 1992, the Shanghai Composite Index fell in the month leading up to the leadership transition. But the index appeared more stable in the month leading up to party congresses in 2007 and 1997, when the incumbent party chief was reaffirmed for a second five-year term.

However, the market tended to make a trend change in the three months following each of the past five party congresses.

“During the years of leadership transition, investors usually have no sense of policy direction until the new generation of leaders formally emerges,” Lee said.

“Whether the indexes climb up [after the congress] usually depends on how strong a reform signal the meeting delivers, or whether there are changes in financial regulations or market liquidity conditions after the meeting,” said Wang Yi, an analyst for Great Wall Securities.

For instance, during the 14th Party Congress, held in 1992, there was a divergence of opinion among the top leadership about whether to continue the “reform and opening up” policy. During the convention, Zhu Rongji, the reformist former premier, entered the Politburo Standing Committee, China’s highest decision-making body, for the first time. He was appointed as vice-premier in 1993 and proceeded to carry out a series of crucial economic and financial reforms.

Wang said mainland shares would likely react in a positive manner at the conclusion of the 19th Party Congress.

Other analysts were also upbeat, with Wan from Partners Capital saying mainland stocks were likely to close the gap with Hong Kong when trading resumes on Monday.

However, he noted that Hong Kong’s stock market is driven more by overseas factors than policy shifts in Beijing, Wan said.

Nonetheless, history shows that Hong Kong’s fortunes can be impacted by mainland policy.

In 2007, the Hang Seng Index surged more than 12,000 points within two months from August, after Beijing said it would consider a “stock connect” scheme to allow mainland investors to directly trade Hong Kong stocks. However, Beijing scrapped the plan soon after the 17th Party Congress, triggering a slump downtrend in the Hang Seng Index.

“Nowadays, investors are paying even more attention to the Chinese economy and the potential impact of its policies on overseas markets,” said Wan.

Still, Wan also cautioned that investors need to prepare for greater volatility in October, amid uncertainties that include efforts by the Federal Reserve to begin unwinding its massive balance sheet.

“There may be further upside to the [Hang Seng] index, but beware of possible volatile swings,” Wan said.