By Margaret Yang
A few positive signals were sent out by Chinese policy makers at the annual China Development Forum over the weekend. The Shanghai composite extended its rally by 2.15% on Monday and closed above 3000 points for the first time in two months. The rally was led by the securities sector, which rose 9.8% on average. Volume picked up as well.
The governor of the PBOC, Mr Zhou Xiaochuan suggested developing a robust capital market to encourage equity financing and reduce companies’ reliance on debt. The country’s corporate debt has expanded to an unprecedented level, which now stands at 160% of its GDP.
He also pointed out that the country should channel more savings into the capital markets, as the country’s savings rate is currently at 46% - among the highest levels in the world. There is a lot of room for policy makers to shift residents’ asset allocation towards equities.
Another bomb thrown to the market was loosened controls on margin financing. China Securities Finance Corp said it will restart offering loans to securities firms. China’s outstanding balance of margin trading has fallen over 60% from 2.2 trillion RMB to the current 0.84 trillion, a level at which the policy makers probably consider it relatively safe to loosen up the control on margin financing. Over the last 2 years, margin balance and stock market performance have exhibited high correlation. As a result, Citic Securities, the largest broker house in mainland, rallied 10%; whereas it’s HK listed shares climbed 8.06%.
HK Exchange (388 hk) went up 5.49%, breaking out with volume over three times its average daily.
Key technical levels:
- Breakout Wedge pattern with huge volume
- Immediate support level- 176
- 20 Day moving average crossed above 50 Day moving average
Margaret Yang Yan, CFA, is a market analyst for CMC Markets Singapore.