Deepened reform heralds extended uptrend

Bulls will continue to run in the A-share market but at a slower pace from now on as focus shifts to China's deepened reform of the capital market where direct financing will play a bigger role－that is the consensus view emerging among experts following better-than-expected second-quarter GDP growth.

The nuanced view is based on the benchmark Shanghai Composite Index's spike of nearly 15 percent in seven trading days since June 30.

Total trading volume recorded on the Shanghai and Shenzhen stock exchanges exceeded 1 trillion yuan ($143 billion) on July 9, and stayed in the stratosphere for six consecutive trading days, a feat not seen in the last five years.

There was more upbeat news. Since July 2, net inflows of foreign capital into the A-share market exceeded 10 billion yuan for four trading days in a row. Automobile, electronic equipment, cyclical stocks such as non-ferrous metals, and a section of the pharmaceutical companies attracted most of the foreign capital.

Over the first six months of the year, the net inflow of foreign capital via the stock connect program between Shanghai, Shenzhen and Hong Kong approached 120 billion yuan, a figure second only to the 160 billion yuan recorded in the first half of 2018.

Analysts from Shanghai-based financial service provider Noah Holdings Ltd wrote in a report that the inflow of overseas capital has been the major driver of the bounce in the A-share market, especially the undervalued sectors. Foreign investors' continued interest in the A-share market has generated a multiplier effect by attracting other capital into the market, said the Noah analysts.

Small wonder, foreign institutions continue to hold a positive outlook.

Laura Wang, chief China equity strategist at Morgan Stanley, wrote in a report released on July 7 that the CSI-300, a key index of Chinese stocks, will climb to 5360 points in the next 12 months, which indicates at least 11-percent growth compared to the position earlier this month. Investors should thus increase or at least hold their A-share investment positions, she said.

Likewise, UBS Wealth Management said in a report released on July 9 that the A-share indexes will further tick up in the next three to six months given the adequate liquidity, relaxed monetary policy and the fiscal stimulus policies. On July 7, Goldman Sachs also advised investors in a report to increase the investment in A shares over the next 12 months, given the strong recovery of the Chinese economy and the contained risk of an epidemic recurrence.

The A-share market is charging ahead on improving macroeconomic indicators that have boosted market confidence. China's second-quarter GDP grew 3.2 percent year-on-year, beating market consensus expectation of 2.4-percent growth－and a sharp contrast to the 6.8-percent contraction in the first quarter.

The Chinese economy has staged a V-shape rebound, backed by better-than-expected performance in industrial production and the great resilience in exports, said Hu Yifan, regional chief investment officer and chief China economist with UBS Global Wealth Management.

Policy supports, especially infrastructure investment driven by government bond issuance, are expected to help sustain the recovery over the second half of the year, when economic growth may recover to about 5-6 percent year-on-year, Hu said.

Home prices recorded in June were on a rise in 61 of the 70 major cities tracked by the National Bureau of Statistics, four more than that of May. The steadily resumed businesses helped sustain demand for home purchases in June while government efforts helped maintain market order, said Kong Peng, chief statistician of the NBS.

As a result, capital started to pour into undervalued A-share stocks of property companies, a traditional cyclical sector. Other cyclical sectors like coal, securities firms, insurance and banks have all benefitted, said Li Qilin, chief economist at the Guangdong-based Yuekai Securities.

"The loosened credit environment, better-than-expected property sales and improving PMI(purchasing managers index) numbers have contributed to a positive outlook for the economic recovery in China. Given the improving economic data, investors will be more risk-taking," he said.

Yang Delong, executive general manager of Shenzhen-based First Seafront Fund, explained that companies specializing in 5G technologies, new energy vehicles, semiconductor chips and consumer electronics had already seen their prices surge in the first six months of the year. Regarding the second half, consumer goods providers securities and technology companies will have more room for growth, he said.

But Yang stressed that a bull market does not necessarily guarantee price rise of all stocks. Companies with strong financial results will certainly see their prices rise, but those with lousy performance or taking advantage of market speculation will be hardly pursued, said Yang.

"A bull market in the future will no longer benefit all A-share companies regardless of their performance. We will see utterly opposite stories. Companies with strong performance will be increasingly favored by investors, a trend that will be increasingly noticeable," he said.

Looking ahead, a healthier capital market where direct financing will play an increasingly bigger role, will facilitate the development of industries related to economic restructuring, like "new infrastructure", which is best represented by 5G and telecommunications.

Technology-heavy sectors showing more noticeable trends of progress, such as consumer electronics and new energy vehicles, will also benefit, according to Founder Securities.

Wang Jian, chief analyst for the non-banking financial sector at Guosen Securities, explained that the development of direct financing is the underlying reason for the recent bull run.

"As China's economic growth is more reliant on innovation in consumption and technologies, more financial resources will be allocated to emerging industries and companies. To cater to their development, a new age of direct financing and equity financing will be ushered in," he said.

Xun Yugen, chief strategist of Haitong Securities, said there was a time when the property industry used to support the rapid growth of China's economy. As bank loans are the major financing channel for property developers, indirect financing has thus made up most part of the country's financing structure. Fixed-income financial products were also more favored by individual Chinese investors.

In China, at least 60 percent of household assets are taken up by property investment, while the ratio is only 25 percent among US families. As a result, stock investment takes up only 2 percent of Chinese household investment. The corresponding figure is more than 33 percent in the United States, according to Haitong Securities.

That is why, on Jan 3, the China Banking and Insurance Regulatory Commission said that more household savings should be guided into the Chinese capital market.

"As China enters the informatization age, the country's economic growth will be driven by service companies providing technologies and consumer goods. Gradually, the property market will weigh less on the economy. Therefore, direct financing best represented by equity financing will become the mainstream. Chinese household savings will get more and more funneled into equity assets, which will be translated into adequate liquidity in the stock market," said Xun.

During the World Economic Forum annual meeting held in Davos, Switzerland, in late January, Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, said the size of direct financing in the Chinese capital market is relatively small at the moment, and can meet 10 percent of the total financing demand. In this sense, the need to enlarge the scale of direct financing will be stressed in the development of the Chinese capital market.

A number of favorable policies to promote direct financing have been introduced this year. China's central bank announced on July 1 a half-percent cut in the interest rate of financial stability refinancing loans to 1.75 percent.

Major progress has been pushing forward the National Equities Exchange and Quotations (NEEQ), an equity trading platform for small-to medium-sized enterprises, to increase the scale of financing and facilitate more mergers and acquisitions.

Companies listed on the NEEQ will further diverge on three different tiers (base, innovation and select). The select tier imposes the strictest standards. Public offering via the NEEQ select tier will start this week.

"The regulators will attach more importance to direct financing, which will sustain companies' long-term development. Therefore, the policies regarding refinancing, restructuring and private placement earlier this year are all conducive to direct equity financing," said Hu Bo, a fund manager at Shenzhen Rongzhi Investment Consultant.

"The development of direct financing will be slow. But in the long run, the capital market will thus be able to seek sustained development. The A-share market will witness a long bull market which deserves a place in history. Listed companies will put up a diverse performance, with quality companies gaining more capital support," he said.

Xu Weihong, an academic committee member of the Pangoal Institution, a Chinese public policy think tank, made field trips to the Yangtze River Delta region and Pearl River Delta region over the past two months to study the public companies there. He understood that the Chinese entrepreneurs are well aware of the risks implied in economic cycles over the 40-year reform and opening-up, and thus well prepared for all the other macroeconomic risks.

"The A-share market is not lacking in quality companies. The government should make necessary efforts to advance supply-side reform. In this sense, direct financing can better serve the real economy and the bull market can last longer," he said.