Con­sol­i­da­tion’s the game in A shares

A sense of un­cer­tainty over both pol­icy direc­tion and yuan weak­ness could well hurt in­vestors’ risk ap­petite

China Daily (Hong Kong) - - BUSINESS - By LI XIANG lix­i­ang@chi­nadaily.com.cn

China’s A-share mar­ket is ex­pected to en­ter a “con­sol­i­da­tion pe­riod” as grow­ing in­fla­tion ex­pec­ta­tions will likely sub­due in­vestors’ risk ap­petite, an­a­lysts said.

The bench­mark Shang­hai Com­pos­ite In­dex has re­bounded by more than 20 per­cent from Jan­uary’s low, en­ter­ing the tech­ni­cal bull-mar­ket ter­ri­tory.

Mar­ket an­a­lysts be­lieve that in­vestors’ ex­pec­ta­tions about mone­tary pol­icy, es­pe­cially in­fla­tion, are key to deter­min­ing the fu­ture trend of the A-share mar­ket.

“We ex­pect the in­fla­tion­ary ex­pec­ta­tions to rise and stay el­e­vated in the short term, es­pe­cially over the next few months. This will af­fect pol­icy ex­pec­ta­tions of the mar­ket and sub­due in­vestors’ risk ap­petite,” said Qin Pei­jing, an an­a­lyst with CITIC Se­cu­ri­ties Co Ltd, in a re­search note.

Qin noted that the 10-year gov­ern­ment bond yield has sur­passed 3 per­cent, a re­flec­tion of in­vestors’ con­cerns over China’s mone­tary poli­cies, es­pe­cially over the Peo­ple’s Bank of China’s in­ten­tion to guide delever­ag­ing in the bond mar­ket.

While most econ­o­mists be­lieve that the Chi­nese econ­omy is ca­pa­ble of achiev­ing a growth rate of over 6.5 per­cent in 2017, some said that Bei­jing will likely face an in­creas­ing pol­icy dilemma in the fu­ture.

“We be­lieve China will be able to achieve the 6.5 per­cent growth tar­get due to strong fis­cal eas­ing in 2017. But this re­quires fur­ther credit ex­pan­sion, which will ex­ac­er­bate the risk of prop­erty bub­bles and in­ten­sify cap­i­tal out­flows,” said Liu Li­nan, a strate­gist at Deutsche Bank. He added that the fall­ing ren­minbi ex­change rate could also have an ad­verse ef­fect on the mar­ket.

Mean­while, the US Fed­eral Re­serve Open Mar­ket Com­mit­tee is due to meet this week and the ex­pec­ta­tion is that they will raise in­ter­est rates, while stick­ing to the plan of a grad­ual rate hike un­til the poli­cies of the Trump ad­min­is­tra­tion be­come clearer.

Econ­o­mists said any rate hike by the US Fed­eral Re­serve would likely limit the room for changes in China’s mone­tary pol­icy. And, the per­sis­tent strength­en­ing of the US dol­lar will con­tinue to weigh on

We ex­pect the in­fla­tion­ary ex­pec­ta­tions to rise and stay el­e­vated in the short term, es­pe­cially over the next few months. This will af­fect pol­icy ex­pec­ta­tions of the mar­ket and sub­due in­vestors’ risk ap­petite.” Qin Pei­jing, an an­a­lyst with CITIC Se­cu­ri­ties Co Ltd

per­cent

yield on the 10-year gov­ern­ment bond, show­ing con­cerns over mone­tary poli­cies

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