People wearing face masks walk past a bank in Beijing on April 4. Strong economic growth would discourage Chinese policymakers from rolling out bigger stimulus measures. The People’s Bank of China has already become more cautious in its injection of liquidity. Photo: Reuters
Opinion
Sylvia Sheng
Sylvia Sheng
Why China’s A-share market is starting to look like a safe haven
China’s economic recovery is on track and policies are cautiously supportive. US tensions and tariff risks remain but China’s containment of resurgent infections is lending its stock market characteristics of a relative safe haven
Chinese A shares are in the spotlight. Following a strong performance in June, the A-share rally has gathered pace this month, surging past its pre-virus high in January.
What drove this exuberant burst of market optimism? Many observers have pointed to a front-page editorial by the state-run China Securities Journal about the importance of fostering a healthy bull market in A shares as the country recovers from the pandemic. The market has also got a boost from China’s successful containment of Covid-19 infections as well as its continuing economic recovery and supportive policies.
Despite worries about a second wave of infections after reports of a fresh outbreak in Beijing in mid-June, the outbreak appears largely under control in China. Daily new cases have dropped into single digits in the past two weeks.
At the same time, China’s economic recovery is well on track with second-quarter gross domestic product growth returning to positive territory in year-on-year terms. The improvement in growth momentum can also be seen in other high-frequency indicators such as sales of new homes and heavy-duty trucks.
Policies have bolstered the recovery too. Overall fiscal support, especially in funding support for infrastructure investment, is likely to exceed that during the 2015-16 easing cycle. The People’s Bank of China has also maintained its dovish stance and rolled out more targeted easing to support small and medium-sized enterprises by lowering the relending and rediscounting rate on July 1.
02:18
Two Sessions 2020: China sets no GDP target, defence spending growth slows
Two Sessions 2020: China sets no GDP target, defence spending growth slows
More recently, investor sentiment has turned rosier. Both the daily turnover of A shares and the margin financing balance have risen sharply since the start of July, to in excess of 1.5 trillion yuan (US$214 billion) and 1.2 trillion yuan, respectively, for the first time since the 2015 stock market bubble.
In addition, northbound flows into A shares, via Stock Connect, have also risen meaningfully in recent weeks, pointing to more bullish sentiment among foreign investors. There also seems to be increased retail participation in the market: new retail investor accounts at brokerage firms surged by more than 30 per cent month-on-month in June.
Investor sentiment is likely to keep fuelling A-share performance, as China’s army of retail investors make it a momentum-driven market. At the same time, many of the sentiment indicators, such as the level of margin leverage, do not look too stretched compared to 2015, pointing to the potential for further improvement.
Meanwhile, the macroeconomic backdrop may turn neutral, but is unlikely to become a drag on the market. While China’s economic recovery is likely continue in the second half of the year, the pace of the recovery will be more moderate as support from pent-up demand eases.
In particular, lower household disposable income might hold back private consumption. Household disposable income fell sharply in the first quarter and, as China focused more on demand stimulus than income transfers during the Covid-19 crisis, it could take a few quarters to return to the pre-virus growth trend.
However, strong economic growth would discourage Chinese policymakers from rolling out bigger stimulus measures. The People’s Bank of China has already become more cautious in its injection of liquidity. China’s policy easing is likely to shift back to a more data-dependent mode, while still remaining accommodative. However, a strong surge in A shares could constrain further easing, as policymakers try to avoid fuelling a stock market bubble and a repeat of the 2015 stock market turmoil.
Investors look at an electronic board showing stock information on the first trading day after the New Year holiday at a brokerage house in Shanghai, on January 3, 2017. Investor sentiment is likely to keep fuelling A-share performance, as China’s army of retail investors make it a momentum-driven market. Photo: Reuters
A key risk to China A-shares continuing to rally would be tighter regulatory measures. There are already signs that Chinese policymakers are trying to tame the market frenzy by cracking down on illegal margin financing. One important indicator to watch is the amount of margin financing in the market. A significant increase in leverage levels could potentially trigger more cooling measures from regulators.
In addition, an escalation of tensions between China and the United States could also weigh on Chinese equities.
As we get closer to the US election in November, risks of US tariff hikes against China are higher as political considerations dominate economic ones in Washington. On the other hand, the risk of a resurgence in Covid-19 infections seems to be more contained in China compared to other economies, lending A shares some characteristics of a relative safe haven.
Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management
This article appeared in the South China Morning Post print edition as: Why China’s A-share market is starting to look like a safe haven
