China’s Capital Markets Are Breathing, As They See A Healthy Correction
$GS, $MS
By any standard, China’s stock market dive in to a Bear market since 12 June is a Key market event.
After diving by over 30% from its June highs, China’s Key stock index saw a nice bounce for a 2nd consecutive day Friday, that on the the back of several government support measures, and market recommendations by Goldie, Morgan and Fidelity Investments.
The benchmark Shanghai Composite Index surged 4.54% to end at 3,877.8 Friday, while the Shenzhen Component Index closed 4.59% higher at 12,038.15. The ChiNext, tracking China’s NAS-style board of growth enterprises, rose 4.11% to end at 2,535.89.
The rally helped restore some confidence among the country’s 90-M retail stock investors, most of whom are short term traders with little financial expertise.
The stock market correction is a painful lesson for us new entrants, the outlook is cautiously optimistic for the long run.
Before the market took a downturn on 12 June, the Shanghai composite had risen by 152% since July 2014 and nearly 60% since the beginning of this year.
The frothy market conditions was a Key factor that triggered the sell-off in June. China’s authorities have launched investigation into “malicious short selling”, suspected to be also behind the deep dive.
The correction looked out of control, as the latest Bull Run was fueled by widespread use of leverage as many participants borrowed money to buy shares, a practice which can magnify both gains and losses.
Fear of the market rout threatening overall financial stability, the government has stepped in with various measures to bolster the market, including pouring in funds and restricting futures trading on a major small-cap index.
Last Thursday, Chinese police joined the securities regulator to investigate “malicious short selling” to stop the bleeding.
The China Banking Regulatory Commission announced Thursday morning that it will allow banks to extend mortgage loans that use share funds as collateral to prop up the stock market.
The PBOC, China’s central bank, announced that it will continue to support the liquidity needs of the China Securities Finance Corporation Limited (CSF), the national margin trading service provider. It said it has made sufficient re-lending to the CSF and approved the latter to issue short-term financial bonds in the inter-bank market to replenish liquidity.
Hence the bounce Thursday and Friday.
While some economists hailed the government’s move to stem the correction risk to the broad economy, others suggest more market-oriented measures be taken.
Despite the bounce Thursday and Friday, Shayne and I believe the market will fluctuate and struggle in the near term as it takes time to disperse market panic and rebuild confidence.
In the long term China’s economic restructuring, accelerating reforms and monetary easing cycles, are likely to continue to underpin the market.
The foundation for prosperity in the capital market is still intact, and I see a long and slow Bull Run ahead. The correction is healthy, but I see another 8% move South before a bottom is in.
But bull or bear, the Chinese stock market has a long way to go in learning to keep its raging temper.
Any financial market that is filled with get-rich-quick stories and excessive profits is not a sustainable and healthy one, hence the current correction.
History tells us that the long-term value and improving productivity of traded companies is the benchmark and foundation for the stock market.
Remember, you cannot negotiate with gravity.
Stay tuned…
HeffX-LTN
Paul Ebeling
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