Silver lining showing for A-share market

With active transactions, upbeat market sentiment, cyclically stronger consumption, and more often than not, economic stimulus packages, the well-known expression "Gold September and Silver October" has often been used to describe the vibrant Chinese property and capital markets in early autumn each year.

The rule seems to be working this time, at least seen from the strong performance of A shares last week, when the benchmark Shanghai Composite Index surged to over 3087 points on Friday, reversing, at least partially, sentiment among investors that had been dampened after the Shanghai index slid below 2700 points on Sept 18, the lowest since Feb 6. Last week marked the index's biggest gain in 16 years.

Even without the strong rally, experts are not very disheartened. The turnover rate of A shares in terms of free float market cap is around 1.5 percent. Chen Guo, chief strategist at China Securities, said this has approached the level when the A-share market reached historic lows.

Listed banks, the market heavyweights, had seen their share prices plummet by 8 percent over the two weeks ended Sept 20. The drastic price decline of banks, which takes place after the drop of other A-share sectors, usually signals the end of the market adjustment, according to Chen.

"The A-share market is ready for bottoming out given companies' profitability, average valuation and trading characteristics," he said.

Positive news is heard in external markets.

The US Federal Reserve announced on Sept 19 (Beijing time) a 50-basis-point cut on its policy rates, the first time since March 2020.

The start of an easing cycle in the US will help to improve A-share liquidity in the short term as pressure on the RMB's foreign exchange rate will be alleviated, opening up room for China's monetary policy, said Wu Xinkun, chief strategist at Haitong Securities.

Foreign capital may flow back into the A-share market over the short run, also improving A-share liquidity at the micro level. Public financial service providers as well as food and beverage companies may benefit in such a scenario, said Wu.

But Wu stressed that a more sustainable rebound in the stock market is determined by company fundamentals. If successive supportive economic policies can help propel China's economic recovery, an upward momentum will be more firmly baked into the A-share market, he added.

According to strategists from Shenwan Hongyuan Securities, a flat renminbi, avoiding further depreciation, is the logic for A-share market's rebound at the macro-level.

If China can also further loosen its monetary policy, keeping a similar pace with the major economies, its stock market can expect a rebound. But if the scale of China's monetary relaxing is limited, even its influence is weaker than expected, a stock market rebound will be short-lived and investors' concern over medium-term economic growth may pick up, they said.

There is also a silver lining showing after the recent deep stock market adjustments in China.

Pan Gongsheng, governor of the People's Bank of China, the country's central bank, said on Sept 24 that a 50-basis-point cut for the reserve requirement ratio will be made in the near term. This will introduce about 1 trillion yuan of long-term capital inflow into the financial market, he said.

He also announced on Sept 24 the launch of a swap program, under which securities firms, asset managers and insurers can obtain liquidity from the central bank through collateralization of their financial assets such as bonds and stock exchange traded funds. The funds obtained from the program can only be used to invest in the stock market. The first phase of the program is set at 500 billion yuan, which scale is open for expansion, according to Pan.

Wu Qing, chairman of China Securities Regulatory Commission, the country's top securities watchdog, said on Sept 24 that they will come up with a guideline to introduce more medium- to long-term capital into the capital market.

The State Council rolled out in April a guideline made up of nine detailed measures to advance the high-quality development of the Chinese capital market. Supervision over initial public offerings, dividend payments and delistings has been emphasized. In this way, the quality of listed companies can be improved, bringing higher returns to investors, the country's Cabinet said in the guideline.

CSRC has also reiterated the importance of improving the quality of A-share companies. It has introduced a set of policies to take a tighter grip over IPOs and step up supervision of listed companies.

According to Nie Wuyi, a strategy researcher from China Galaxy Securities, high-quality listed companies are the ultimate sources of confidence to investors.

"The equity market matures in progressive waves. It is a process during which quality companies stand out and the lousy ones are eliminated. This can be proven by the past 30 years of the Chinese stock market. Less competitive companies or those making fraudulent disclosure were screened out when the market underwent drastic volatility. But it was also during this period when quality companies won the hearts of long-term investors," he said.

A quality listed company should see its growth path in line with China's economic development trajectory. A clear development strategy, complete corporate governance, a strong talent pool, stress on long-term and stable management, and importance attached to safeguarding shareholders' interests are crucial to make a quality company, said Nie.

Zheng Guangwen, chairman of Shenyang Fortune Precision Equipment, understands that technological innovation is now key to improving the quality of companies and they need to grow their unique competitiveness in terms of strategy, business models, development concepts or the grasp of core technologies so that the capital can be more patient, willing to grow with the companies for longer terms.

On the other hand, a right understanding of IPO should be more deeply rooted among Chinese companies, said Pi Haizhou, an independent financial analyst.

The idea of profiteering from the stock market should be uprooted. While issuance prices used to soar, it was partly pushed up by sponsors, who could seek more commission from higher IPO prices. This somehow was in line with the interest of some actual controllers, major stakeholders and board members, who would like to cash in by reducing their shares shortly after the company's IPO. All these have largely impaired investors' interests and jeopardized the sustainable development of the Chinese stock market, explained Pi.

Such mindset should therefore be eradicated. A complete mechanism will help to achieve the goal, preventing profiteering at the very beginning and making room for the real quality companies in the stock market, he added.

It is good news that the A-share market is already undergoing structural transformation under which investors are taking central stage, said Fang Dongming, head of China Global Markets at UBS.

Efforts are being made to usher in more medium- to long-term capital into the A-share market. While the digital economy, high-end manufacturing and new energy are the drivers of China's high-quality development, corresponding financial support should be stepped up. A complete and more effective secondary market can benefit innovative companies, said Fang.

The sound development of the Chinese capital market over the longer term is inseparable from a larger market size and bigger appeal to investors, said Fan Hua, head of global asset management giant BlackRock in China.

Overseas capital will of course come when the market size is big enough and its returns are lucrative. Domestic institutions can also be more active in expanding their overseas footprints. In this way, two-way capital flow can be smoother, which is also conducive to the sustainable development of the Chinese capital market, she said.

Greg Yu, general manager of JP Morgan Securities (China) Co Ltd, suggested that more long-term asset management firms such as pension fund managers, overseas hedge funds and insurers should be allowed to access the Chinese stock market. This will increase the trading value, lift market liquidity and improve market vitality. These institutions can also serve as market stabilizers, he said.