Beijing’s reiteration of its policy aims of growth sustainability and structural reform led A-shares to sell off recently – but this was no bad thing as it likely alleviated the need for draconian anti boom-bust measures.
Stronger-than-expected Q1 2019 economic data prompted Beijing to change its tone after the 19 April Politburo meeting, putting less stress on GDP growth and re-emphasising the need for structural reform and debt reduction and underscoring our long-held view that China's macroeconomic policy goal has shifted to growth sustainability via structural reform from growth maximisation via excessive investment.
Wiping away some of the froth on A-shares
While in the long term, this should be positive for China’s economy and market development, the A-shares market did not like it. It sold off by 5% between 19 and 30 April. Many investors took profits, interpreting the change in tone as a sign that the recent policy-easing vigour is past its peak. This may be a short-term setback for A-shares. It is also a blessing in disguise for the market's outlook since we believe the froth - which we warned earlier could lead to a harsh regulatory clampdown - has subsided.
Exhibit 1: China’s stock market indices take a dipSource: CEIC, BNP Paribas Asset Management (Asia)
The average daily equity trading volume has retreated from more than RMB 1.1 trillion in mid-March to about RMB 750 billion. More crucially, the growth in margin financing for stock punting has slowed from around RMB 160 billion month-on-month (MoM) in mid-March to about RMB 65 billion MoM. This moderation suggests that the authorities have reacted early this time to tackle market froth and have thus greatly reduced the risk of a 2015-style market crash.
Aiming for a smoother path
Avoiding a repeat of such a market boom-bust cycle is needed to help eradicate the Chinese stock market’s casino image. It is thus crucial to the successful opening-up of China’s equity market to foreign investors and to the MSCI A-shares inclusion plan. This is why we believe the recent correction on the A-shares market is a blessing in disguise – it has reduced the irrational exuberance of the first quarter before it reached a stage where draconian action would have been needed to ‘crash the party’.
Volatility in the A-shares market will likely remain high in the near term as many local investors now see good news on the economy as bad news for further policy easing. Fundamentally, as recovery becomes more evident in coming months, and assuming Sino-US trade tensions ease again, Beijing should scale back its easing policy. However, without any threat of inflation and with Beijing intending to nudge its way back to its debt reduction and structural reform programmes (which are deflationary forces), we believe the odds of premature policy tightening wreaking havoc the onshore market are low.
Although the macroeconomic policy emphasis has shifted away from maximising GDP growth, the authorities are still likely to maintain an easing bias to ensure a stable economy in the run-up to the 70th anniversary of the formation of the People’s Republic this October. In the near term, June's launch of the new Shanghai Tech Innovation Board, which will list local tech unicorns such as Tencent and Alibaba, also argues for the need for liquidity support to ensure success.
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