MNI: China Stocks To Test Higher Levels, Drive Confidence

China’s A-share rally could further lift the Shanghai Composite and CSI 300 past decade highs, as loose liquidity, policy support and stronger risk appetite drive a broad revaluation of equity assets, advisors and analysts told MNI, noting a rising equity market will help improve consumer confidence and economic momentum.

“Decisionmakers urgently need a bull market to restore confidence, particularly as the property downturn and slowing infrastructure investment weigh on growth,” said Zhao Jian, head of the Atlantis Research Institute, adding a sustained rally could also help generate new growth momentum and repair the national balance sheet during the current economic transition. (See MNI: China's Major Cities To Ease Home Sale Rules Further)

The Shanghai Composite, which closed Monday trading 1.51% higher at 3,883.56, could climb another 200 points to 4,000 this year – a level last seen in April 2015 – on top of its more than 15% year-to-date gain if policymakers maintain a steady stance and avoid denting investor expectations, said Liu Feng, director at the China Chief Economist Forum, pointing to recent equity market gains. Although, a market bubble looks unlikely based on overall valuations, Liu added, describing the outlook as “cautiously optimistic.” However,he warned that some technology stocks have surged on speculation despite their limited weight.

Valuations on the CSI 300 still have room to rise, with China Minsheng Bank analysts pointing to as much as 30% further upside. As of Aug 14, the index’s P/E ratio had risen to 13.4 from 10.7 since Beijing rolled out market support measures last September, still below the 2019–2021 bull run when multiples expanded to 17.5 from 10.2. 

The Index’s dynamic P/E ratio stands at 14.11 as of Aug 22, only mid-range compared with global peers, Liu noted. While A-share market capitalisation topped CNY100 trillion for the first time last week, its ratio to GDP remains well below that of the U.S. and Japan, he added.

Capital reallocation will likely persist over the next few months as investors rotate out of low-return, deflationary assets such as bonds, Zhao said, pointing to the more than CNY1 trillion of household deposits that shifted into brokerage margin accounts in July, signalling stronger retail participation and greater volatility. 

Alongside profit-taking, state-backed “national team” investors will act as stabilisers to prevent a “crazy bull” scenario, he said, while urging retail investors to participate through more diversified exchange-traded and equity funds.

Other supportive factors include ample liquidity in addition to expectations of U.S. and PBOC rate cuts, historically low valuations of Chinese equity assets and better sentiment after policymakers signalled determination to lift asset prices out of deflation first, Zhao said. (See MNI: PBOC To Make Slight Cuts In Q4, A-Share Rally Welcomed)

FUNDAMENTALS

Liu, formerly chief economist at China Galaxy Securities, cautioned that fundamentals must ultimately validate the liquidity-driven rally, fuelled by long-term funds such as insurers, alongside northbound and leveraged inflows. While the wider economy remains on track to meet the "around 5%" growth target, authorities need to improve policy transmission to ensure credit reaches companies and fiscal subsidies benefit consumers, which is more important than rolling out new measures, Liu continued. Individual investors appear more cautious than before amid weaker spending, contributing to the current “slow bull” market, he added.

Corporate earnings have begun to recover after authorities curbed excessive price competition, as core CPI rose for a third straight month to 0.8% in July. Still, clearing long-overdue corporate accounts is critical to restoring market confidence, Liu said, urging government departments and SOEs to honour procurement payment deadlines and establish an accounts receivable confirmation and financing platform.

Beyond higher dividends and buybacks encouraged by regulators, M&A should be promoted to optimise equity supply, Liu argued, adding such deals ought to take place in the open market to enhance transparency and price discovery. He criticised shortcomings in the delisting mechanism and said listed SOEs often retain the privilege of conducting M&A outside the secondary market. “It will be difficult to cultivate a Chinese equivalent of the U.S. ‘Seven Sisters’ tech leaders if the current structure, dominated by infrequently traded sovereign funds and mainly state-controlled corporate shareholders, is not optimised,” Liu said.