Assistant general manager of the Guosen Securities He Chengying recently published an article in the Shanghai Securities Journal, saying that the tendency of the Renminbi appreciation over a long term might boost a relatively large bull market, and therefore it is necessary to analyze the impact of Renminbi revaluation on China's securities market from a strategic point of view.

He says that for a long time to come, as long as people keep a steady expectation for the Renminbi appreciation, international capital will keep flowing into China's securities market. Its influence to the securities market will be larger than economic growth or company's business performance, and it will become a strong driving force to push up the securities market.

According to He, the real impetus for the Chinese stock market now is the appreciation of Renminbi. In addition, since there is a oversupply of Renminbi, and other relative markets' attractions to Renminbi depreciation, we can expect that in the two to three years to come, China's securities market might have a good performance. During this period, China's currency exchange regime process might become a decisive factor to determine the rate and the speed of increase in the securities market. The exchange regime process will highly determine how much foreign capital will flow into the Chinese market.

Since the impact of Renminbi to stock index depends on its rate of increase, Equilibrium Real Exchange Rate should be the key point in the issue. Taking various factors into consideration, it is believed that the Renminbi is underestimated by 20% from its current value. It is expected that the Renminbi is revalued by 4% every year and based on compound interest calculation, it is expected that the Renminbi can rise for five years to come. During this period, the stock market might have three year's of bull market and two years for adjustment. When Renminbi is revalued by 18%, stock index will reach the highest point. The Shanghai stock index can then reach 6,900 points. Considering other factors, such as the ongoing stock reform, Shanghai stock index might touch 7,000 points. However, it should be noted that the ever-increasing stock market expansion will cause a negative effect to the rise of the index.

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