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 trillion yuan ($1.7 trillion) in the 2 1/2 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,” said 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, only two and a bit years away from 2015, 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 Sunday about excessive corporate debt, signaling such efforts are unlikely to ease.
|Property||Curbs on home resales in some cities|
|Money-market funds||Limits on investment concentration and low-grade assets|
|Insurance||Crackdown on short-term, high-yield offerings|
|Asset-management products||Implicit government guarantees weakened; banks asked to lower rates on wealth-management products|
|Overseas investments||Curbs on buying insurance in Hong Kong, stricter disclosure requirements for exchanging currencies|
|Cryptocurrencies||Exchange trading and token sales banned|
In a speech kicking off the 19th Party Congress on Wednesday, 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 prioritize property purchases, and the wealthy to seek overseas investments, said 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.
Caricatured in the 2015 bust as “aunties” who ignore data and merely follow headlines, China’s retail investors are also taking more notice of improving fundamentals, said Bocom’s Hong. Data released on Thursday 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 said. “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 stabilized.”
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 percent this year, lagging a long way behind gains in Asian and offshore Chinese stocks. While the balance of margin debt has climbed back toward 1 trillion yuan, it’s been roughly flat as a percentage of market capitalization 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 this 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 percent over three days.
“You can say the equity market is one of the only channels through which you can really absorb significant redirected flows,” said 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 policy makers prefer.
“Rebound in corporate profit growth and still-high savings rate will support fund flows to quality equity names,” analysts led by Richard Xu wrote in a report. “This will be a lasting but somewhat gradual process, unlike the boom in 2015.”
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