China stocks heading up after a breather

Asia Unhedged believes Chinese stocks are poised for further growth.

A carefully executed People’s Bank of China (PBOC) liquidity move and a slight improvement in China’s May PMI last week saw investors pour back into the market after yet another round of consolidation. The SHCOMP was up 8.9% (USD terms) and is up 55.4% for the year. Signs point to further upside, especially as China’s housing market begins to stir and the central bank continues to stick with an easier monetary policy.

Monday’s bigger-than-expected slide in China’s imports in May merely underscores the expectations for more stimulus and easing.

Flat-lining Shanghai Interbank Offered Rates since late May hint that the PBOC is leery of pouring gas on the fire of the current bull market in Chinese stocks. Market mandarins have also applied the brakes by forcing brokerages to strictly comply with margin trading limits. At the same time, there’s lots of liquidity in the system. The PBOC will probably continue to use the full range of its open market operations tools to foster cautious expansion. Investors are apparently on the same page: 4.4 million new A-share trading accounts were opened during May 25-29, a new record week. With the psychological level of 5,000 breached, and the RSI indicator sitting just under 70 (the threshold between “Overbought” and “Neutral”), the Shanghai Composite Index is preparing for another leg up.

Another upside factor is that the cost of short-term borrowings in Shanghai’s interbank market has plunged by roughly 200 bps since 1Q. This is the biggest quarterly downward adjustment since 4Q of 2008 when the global financial crisis peaked. One can argue that sharply lower rates during 2Q have added more than 1200 points or 30% to the Shanghai Composite Index. With China’s CPI expected to drop once again in May to 1.3-1.4% vs. April’s 1.5%, and the PPI barely budging from -4.6%, further monetary easing is in the cards to sustain a still feeble economic recovery. All this points to further equities upside.

 



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