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| Signs are mounting that the recent rally in Chinese stocks isn't a short-term phenomenon. Zuma Press |
Image Source: online.wsj.com
Signs are mounting that the recent rally in
Chinese stocks—the Shanghai Composite Index has risen for five months in
a row—isn't a short-term phenomenon.
After
years of poor performance, the benchmark index has advanced 15% this
quarter, its biggest quarterly gain since 2009. The rally comes as
investors' interest shifts from China's once-hot property sector to
stocks.
"China's stock market may be at a
turning point," said Jiang Gui, general manager of Shanghai Simpleway
Asset Management Co., which manages $100 million in assets.
There have been false starts before.
The Shanghai Composite, comprised of yuan-denominated Class A shares,
surged 15% in December 2012, creating hopes that the market was coming
back to life, but the gains were short-lived.
This
time, with 217,051 new stock accounts opened in the week ending Sept.
19, according to the China Securities Depository and Clearing Corp., the
highest level since March 30, 2012, it looks as though investors are
willing to give the stock market another chance.
The
longevity of the current rally will likely depend on retail investors,
since individual traders dominate stock trading in mainland China.
Eva Zhang,
a financial manager in the southwestern city of Chongqing,
started buying stocks earlier this year. "I increased my positions in
July and August and made money," she said. But Ms. Zhang started to turn
cautious on Chinese stocks in mid-September, and has sold part of her
holdings since then.
"I'm getting ready to exit the market once there are signs of an end of the run-up," she said.
Institutional
investors could take a more long-term approach, but China's
asset-management industry still plays a relatively small role in a
market dominated by retail investors. Yet there are hopes that an influx
of foreign funds could help support the next stage of the rally.
China's
domestic stock market has been largely closed off from global capital,
but in October a new program connecting the markets in Shanghai and Hong
Kong will provide international investors an unprecedented level of
access to shares in mainland China. The program, known as Shanghai-Hong Kong Stock Connect,
will permit investors in Hong Kong to send as much as 300 billion yuan
($49 billion) into mainland China, allowing mainland investors to buy
Hong Kong stocks as well.
The trading link will "allow all, instead of several hundreds of
foreign investors to trade A shares. This will enhance the efficiency
of the stock market while bringing in unlimited business opportunities
for brokers, fund managers and investors," said Yang Xia, head of China
equities at UBS Securities.
Until the
advent of Stock Connect, only mainland residents, and foreign
institutions that had received purchase quotas from the government,
could buy A shares.
The Shanghai
Composite has gained nearly 12% so far this year, a sharp turnaround for
a market that has performed less well than its global peers since 2010,
weighed down by a deteriorating economic outlook. Poorly performing
initial public offerings and the availability of better returns in the
property market have kept people on the sidelines.
The
benchmark index has yet to fully recover from the turmoil of the global
financial crisis in the late 2000s. While other major indexes, such as
the Dow Jones Industrial Average and S&P 500 index, have reached
record highs this year, the Shanghai Composite closed Tuesday at
2363.87, compared with its 2007 peak of 6000 points.
The
rally in Chinese stocks this quarter comes as the country's real-estate
market loses its allure. The government has spent years trying gain
control of the upward spiral in home prices, and this year the market
has finally started to cool. Housing sales were down 10.9% over the
first eight months of the year, compared with the same period in 2013.
The
stock gains are being helped "by the soft landing in the real-estate
market," said
Aaron Boesky,
the chief executive of Marco Polo Pure Asset Management in Hong
Kong, which manages $75 million of assets. "This is exactly what the
government wants and it is exactly what the stock market needs."
Douglas Anderson leads a team of financial experts at Wall Street Capital Partners who help clients make the best decisions to grow their money. Visit this website to learn more about strategic investing, mergers, acquisitions, and the stock market.
