Looming US stock correction won’t hurt A shares
Anear- term correction that apparently looms in the US stock market won’t have much impact on China’s A- share market, which can still rise during the rest of this year.
There has been a strong upward trend in US equities this year, buoyed by the robust growth of US corporate earnings. The US stock rally, however, faces a setback in September as the Federal Reserve Board is expected to announce the start of its balance sheet reduction at its next meeting, which is scheduled for September 19- 20.
Risk indicators already point to worrying signs of excess in US stocks. The S& P 500 VIX index, a gauge of fear in the market, soared more than 50 percent during the 12- month period that ended on August 17. Additionally, the put- call ratio, used to assess bearish or bullish sentiment, stood at 0.68 on August 17, moving closer to 0.9 – the traditional demarcation between a strong and weak US stock market performance.
That doesn’t mean it is bear market time, but these signs seem to bode ill for US stocks in the months to come.
The looming correction in the US stock market, as such, won’t lead to an overreaction in China’s A- share market. The correlation between the two markets, as measured by volatility, is only about 10 percent to 20 percent. Shares in the Chinese mainland are likely to trend upward for several key reasons.
First, China’s economic fundamentals remain stable. GDP growth was 6.9 percent year- on- year in the second quarter, according to official data. Observers believe that the government’s growth target of about 6.5 percent for this year is achievable. Exports have staged a strong rebound and foreign exchange reserves have kept rising.
Second, the central government’s dual push for supply- side reforms and mixed- ownership reforms is expected to unleash new sources of growth. There are great opportunities ahead for “New Economy” sectors – notably Internetpowered, technology- related businesses.
Third, upward momentum will be provided by the inclusion of mainland shares in MSCI’s benchmark Emerging Markets Index starting in May 2018. That development will prompt many financial reforms aimed at aligning the mainland equity market with its international peers. These efforts may pose some shortterm difficulties, but they will ultimately be a boon for mainland stocks as they will reassure and attract foreign investors and boost A shares.
Take the benchmark Shanghai Composite Index as an example. If the index breaks above 3,300 points, it is set to test the key resistance level of 3,600 points. Such an upward revision of about 10 percent from the current level wouldn’t match the gains that have been seen in markets such as the US. But it would signal a breakthrough for A shares, which have stagnated for quite some time. The index closed up 1.83 percent at 3,331.52 on Friday. All these factors mean that China will persist in its efforts to maintain stock market stability and avoid volatility in either direction. That said, fears that the market may be on the wrong track again are essentially overblown. The China Securities Regulatory Commission recently said that it had completely removed curbs on index futures trading that were put in place during the country’s 2015 stock market collapse.
The development of stock options and futures needs to be accompanied by a mature equities market, which has yet to top China’s financial market reform agenda. Reforms of the mainland equity market have centered on attracting more institutional investors through initiatives such as MSCI’s inclusion of mainland stocks into its Emerging Markets Index. The presence of those investors will help in reducing market volatility, not the reverse.
Shares in the Chinese mainland are likely to trend upward for several key reasons.