The first wave of stock market recovery in China is underway, company profits are high and the invisible hand of “sentiment” has settled on the positive.
Stronger-than-expected rebound of the Chinese market since December is holding good, with mainland indices rising mid-week, slowly opening the gates for a bull run. The Shanghai Composite Index climbed 1 per cent to 2382.48 points, on Wednesday, reaching its highest level in nearly eight months, with thousands of investors and many cash-strapped companies now hoping for some market returns this year.
Since December, the Shanghai Composite has risen almost 18 per cent, despite occasionally stumbling. This rally, which is the strongest in nearly 48 months, has provided opportunity for thousands of investors to unload some part of their holdings to reduce accumulated paper loss over several years now. More than 500,000 investment account holders with various stockbrokerages have reportedly sold all their share holdings within the past one month.
The number of publicly traded companies, big and small, attempting to raise funds in the market by issuing new shares is also rising. Last year, more than 800 applications for IPO filing was pending with regulatory authorities, but restrictions will probably be lifted this year. Many Chinese enterprises are eagerly hoping that a sustained stock market rally can help ease the financial strain brought about by excessive borrowings from banks to finance growth since equity funding was largely choked off by the prolonged slump.
Will the rally last or will it turn out to be yet another mirage? This time around there are enough indications that gains from the real economy and the power of favourable market sentiment will combine to create a critical mass. Things took a turn since late 2012, when it became apparent that foreign institutional investors were quietly rebuilding their portfolios here, convinced that stocks of some major Chinese companies were selling at bargain-basement prices. At that time, the average market price to earnings ratio was 10.7 times; this has now climbed to 12.57 times. The news of their purchases has been widely credited with helping to launch the rally. But foreign investors’ enthusiasm is mostly a psychological boost because the inflow of overseas investment under the Qualified Foreign Institutional Investor programme is relatively small.
It is the earnings potential of the listed companies that is providing the actual boost. Both Shanghai and Shenzhen bourses are surging this week because of a positive earnings outlook of Chinese firms. Profits made by industrial companies jumped 17.3 per cent in December from a year earlier, according to the National Bureau of Statistics. A manufacturing activity index is recording a 24-month high, indicating solid rebound. Property stocks are also looking up with Beijing’s sales of commercial property in January rising by an incredible 570 percent year-on-year. This week, more than 20 stocks, including China Merchants Securities Co, rose by their daily limit of 10 percent, across various industries, driven mainly by the news about a rise in industry’s overall profit level.
Securities firms — and there are at least 22 of them listed — have maximum room to rise this year. Unlike banks and insurance companies, securities firms are lightweight and have more room to gain, now that the China Securities Regulatory Commission is making the right noises to open up the market further. There is also a likelihood that China may further open its A-share market to investors from Taiwan.
As things stand, the first wave of a market rally is being led by financial and property companies, which should be followed by telecom and technology companies. But the best gainers this year may turn out to be consumer and healthcare firms which will ride the wave of a new middle class and greater government spending on health care.