The expression “Gold September and Silver October” to describe the Chinese capital markets in early autumn seems to have been vindicated, at least seen from the strong performance of A shares last week, when the benchmark Shanghai Composite Index surged to over 3087 points on September 27. This at least partially reversed investor sentiment dampened after the Shanghai index slid below 2700 points on September 18, its lowest reading since February 6. Last week marked the index’s biggest gain in 16 years. “The A-share market is ready for bottoming out given companies’ profitability, average valuation and trading characteristics,” said Chen Guo, Chief Strategist at China Securities.
The U.S. Federal Reserve announced on September 19 (Beijing time) a 50-basis-point cut of its policy rates, the first time since March 2020. The start of an easing cycle in the U.S. will help to improve A-share liquidity in the short term as pressure on the renminbi’s foreign exchange rate will be alleviated, opening up room for China’s monetary policy, said Wu Xinkun, Chief Strategist at Haitong Securities. Foreign capital may flow back into the A-share market over the short run, also improving A-share liquidity at the micro level. Public financial service providers as well as food and beverage companies may benefit in such a scenario, said Wu.
But Wu stressed that a more sustainable rebound in the stock market is determined by company fundamentals. If successive supportive economic policies can help propel China’s economic recovery, an upward momentum will be more sustainable in the A-share market, he added. According to strategists from Shenwan Hongyuan Securities, a flat renminbi, avoiding further depreciation, is the reason for the A-share market’s rebound at the macro-level. If China can also further loosen its monetary policy, keeping a similar pace with the major economies, its stock market can expect a rebound. But if the scale of China’s monetary relaxing is limited, a stock market rebound will be short-lived and investors’ concern over medium-term economic growth may pick up, they said.
There is also a silver lining showing after the recent deep stock market adjustments in China. Pan Gongsheng, Governor of the People’s Bank of China (PBOC), said on September 24 that a 50-basis-point cut for the reserve requirement ratio (RRR) will be made in the near term. This will introduce about CNY1 trillion of long-term capital inflow into the financial market, he said. He also announced a swap program, under which securities firms, asset managers and insurers can obtain liquidity from the central bank through collateralization of their financial assets such as bonds and stock exchange traded funds. The funds obtained from the program can only be used to invest in the stock market. The first phase of the program is set at CNY500 billion, which scale is open for expansion, according to Pan.
Wu Qing, Chairman of China Securities Regulatory Commission (CSRC), said a guideline to introduce more medium- to long-term capital into the capital market is being worked out. In April, the Chinese government took measures to advance the high-quality development of the Chinese capital market. Supervision over initial public offerings (IPOs), dividend payments and delistings has been emphasized. In this way, the quality of listed companies can be improved, bringing higher returns to investors. The CSRC has also reiterated the importance of improving the quality of A-share companies. It has introduced a set of policies to take a tighter grip over IPOs and step up supervision of listed companies.
According to Nie Wuyi, Strategy Researcher at China Galaxy Securities, high-quality listed companies are the ultimate sources of confidence to investors. “The equity market matures in progressive waves. It is a process during which quality companies stand out and the lousy ones are eliminated. This can be proven by the past 30 years of the Chinese stock market. Less competitive companies or those making fraudulent disclosure were screened out when the market underwent drastic volatility. But it was also during this period when quality companies won the hearts of long-term investors,” he said.
Pi Haizhou, an independent financial analyst, said that the idea of profiteering from the stock market should be abandoned. While issuance prices used to soar, it was partly pushed up by sponsors, who could seek more commission from higher IPO prices. This somehow was in line with the interest of some actual controllers, major stakeholders and board members, who would like to cash in by reducing their shares shortly after the company’s IPO. All this has largely impaired investors’ interests and jeopardized the sustainable development of the Chinese stock market, explained Pi. Such mindset should therefore be eradicated. A complete mechanism will help to achieve the goal, preventing profiteering at the very beginning and making room for the real quality companies in the stock market, he added, as reported by the China Daily.
