Shanghai Composite Index enters bear market territory

minutes 2018/06/26 09:29:06
A-share, Shanghai Composite Index, China

Jun 26, 2018 (China Knowledge) - China's A-share market ended Tuesday trading session on mix as investors continue to weigh on the rising Sino-US trade tensions.

The Shanghai Composite Index recovered slightly after stumbling by nearly 2% in the morning, and finally ended down 0.5% to 2,844.51 points. Since the highs of January this year, the Shanghai Composite Index has declined by more than 20% and have entered into a bear market territory.

Shenzhen Component Index and the Growth Enterprise Market (GEM) both closed higher today. The Shenzhen Component Index ended the session slightly positive at 9,339.37 points, up 0.16%, with turnover of RMB 187.4 billion. The GEM closed 1.71% higher at 1,564.92 points, with a turnover of RMB 66.2 billion.

In the afternoon trading session, China digital related stocks led the rise, with domestic chips, software and other technology stocks driving the growth enterprise market (GEM) and the broader market to rebound.

UBS asset management believes that the China A-share market and Hong Kong stock market will continue to face stock correction in the near future, but they remained optimistic about the long-term performance of the stock market.

"Market adjustment presents a buying opportunity for some high-quality companies. From the perspective of the China A-share market alone, some companies do not have high valuation. Even when compared with similar global brand companies, the valuation is not high. Moreover, China's enterprises have more room for growth - because they have not gone global yet", a UBS asset management staff said, adding further that the number of high-quality companies have recently adjusted their stock prices, and foreign-funded institutions are actively buying.

UBS Asset Management pointed out that it is a pity that Chinese investors are selling high-quality assets because they are worried about the performance of the short-term market, he added. As compared to 10 years ago, the number of companies that is worth to invest for a long term has increased. For example, China leads the world in some internet related industries. Based on the ageing population trend that the country is facing, UBS Asset Management believes that pension-related and medical-related sectors will benefit.

In the current situation, investors need to identify companies that can sustain long-term growth, identify leading companies in some high-growth industries, and give them reasonable growth expectations, such as an annual growth rate of 15% to 20%.

Two days ago, the People's Bank of China announced that it will cut the reserve requirement ratio of some banks from July 5, the third time in the year. The ratio cut will release approximately RMB 500 billion (USD 77 billion) for the country's five state-owned banks (Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, China Construction Bank, and Bank of Communications) and 12 joint-stock commercial banks to encourage debt-for-equity swaps, which involved swapping some loans into equity stakes of the borrowers, in order to reduce the debt burden of enterprises. The move would also reduce banks' non-performing loans ratio, which will ultimately improve the health of banks' balance sheet and quality of assets held by banks. This has the potential to enhance the confidence of the economy, given that banks are key enabler of financial activities.

The cut in the RMB deposits reserve ratio for other banks including postal savings banks, city commercial banks, non-county rural commercial banks and foreign banks will release about RMB 200 billion (USD 31 billion) to support related banks in granting loans to small and micro enterprises. There is a tendency that state-owned enterprises get greater credit access from banks, as compared to these small and micro enterprises which often struggled to get funds.

The easing of liquidity to the small and micro enterprises embodies the policymakers’ desire to direct liquidity flow into the real economy instead of the virtual economy, which have previously created speculative price bubbles in sectors like the property market.

While trade tension has taken a toll on China's stock market, Beijing policymakers are monitoring the developments closely and have shown that they are capable of using various policy tools to restore market confidence.

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