China’s massive money may return to stocks

PROPERTY, overseas investments and shadow-banking products have all been targeted by China’s campaign to curb financial risks over the past year. What’s left?

Some analysts are betting that restrictions on other popular investment channels will lure what’s often called China’s giant ball of money back into stocks which, despite steady gains, have seen a slow take-up in volumes since a spectacular boom and bust in 2015.

Chinese equity holdings will swell by up to 11 tril renminbi (RM7.02 tril) in the two-and-a-half years through end-2019 amid policies to clean up the financial system, Morgan Stanley predicts.

For China, a reinvigorated stock market has the benefit of reducing the economy’s reliance on debt – while also creating the risk of another speculative frenzy. This time around, however, there’s a stronger fundamental case for stocks: economic data and earnings have improved, and the government has had some success in lowering leverage in the financial system.

“Economic fundamentals are improving, valuations are OK and there’s a global phenomenon of low volatility – that’s why stocks are in an ideal environment to heal,” says Hao Hong, chief strategist at Bocom International Holdings Co, who predicted the market’s peak and trough in 2015. “But to speak of frenzies in stocks again – it’s probably a little too early.”

China’s growing wealth has been known to whip up periodic manias in various assets from stocks and homes to commodities and bitcoin, as investors seek to dodge the regulatory whack-a-mole.

The government’s campaign to curb financial risks has intensified over the past year, targeting many of the nation’s most popular investment channels. People’s Bank of China governor Zhou Xiaochuan warned on Oct 15 about excessive corporate debt, signalling such efforts are unlikely to ease.

In a speech kicking off the 19th Party Congress on Oct 18, President Xi Jinping said China will continue to strengthen financial regulation and defend against systemic risk. He reiterated that housing is for living in, not speculation.

Yet despite the curbs, Chinese people who don’t own homes are still likely to prioritise property purchases, and the wealthy to seek overseas investments, says Thomas Deng, chief China strategist at UBS Wealth Management. Domestically, equities are a good choice for wealth growth, while bonds’ appeal is their liquidity, Deng added.

China’s retail investors are also taking more notice of improving fundamentals, says Bocom’s Hong. Data released on Oct 19 showed third-quarter economic growth as well as September’s retail sales and industrial production were close to estimates.

“Attention is being paid more to earnings quality and also good companies,” he says. “At the end of the day, the incentive to invest in the stock market is driven by not so much by liquidity but by the prospect of economic growth, which has kind of stabilised.”


Small caps

He predicts both onshore and offshore Chinese markets will keep rallying, and buying will spread to small caps.

Onshore equities remain are far from the heady days of 2015. The Shanghai Composite Index has risen 8.5% this year, lagging a long way behind gains in Asian and offshore Chinese stocks. While the balance of margin debt has climbed back towards one tril renminbi, it’s been roughly flat as a percentage of market capitalisation for most of this year. New investors have not rushed in.

And with the deleveraging campaign slowing money supply growth, stocks may not be entirely insulated either. Bonds and small-cap shares slumped last week after Zhou’s comments, with the 10-year sovereign yield jumping to the highest since December 2014 and the ChiNext index of smaller companies falling 3% over three days.


Undramatic flows

“You can say the equity market is one of the only channels through which you can really absorb significant redirected flows,” says Logan Wright, Hong Kong-based director of China markets research at Rhodium Group LLC. “But at the same time if you’re seeing a monetary aggregates slowdown, it’s hard to see why equities are necessarily supported in that environment.”

To Morgan Stanley, a combination of solid market fundamentals and curbs on alternatives will lure money back into equities. But the inflows will be less dramatic – which is probably what policymakers prefer.

This article first appeared in Focus Malaysia Issue 255.