Will Reforms End Chinese Stocks’ Losing Streak?

on Aug 8, 2012

With China’s market securities regulator constantly announcing reforms to boost the country’s stock market, analysts seem divided in their predictions about the future of Chinese stocks. Recently, both the Financial Times and Bloomberg Businessweek reported conflicting views of analysts, with some market specialists predicting rebounding growth for Chinese stocks, and others seeing the country’s benchmark stock index as continuing to tumble on account of slower economic growth.

The new reforms regarding China’s stock market are associated with Guo Shuqing who became chairman of the China Securities Regulatory Commission (CSRC) in October 2011. The FT reports that barely a week has passed without Mr Guo announcing some new measure to improve the country’s market. Under Mr Guo’s governance, the CSRC cut transaction fees, changed how initial public offerings are priced and lifted the cap on foreign ownership of Chinese stocks and bonds from $30 billion to $80 billion. One of CSRC’s most recent initiatives, as reported by Bloomberg on August 6, is letting Chinese workers choose as much as 30 percent of their wages to be paid in shares of their publicly-traded employers.

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!m[](/uploads/story/238/thumbs/pic1_inline.png)The FT, however, reports that despite Mr Guo’s reformist zeal, the Shanghai Composite Index is down nearly 13 percent since the new regulator took office. Yet, it is too early to dismiss the reforms as a failure, with some analysts noting that the measures are likely to put the stock market on a more solid footing, helping to ensure that it will serve as a direct financing channel for the economy.

The Swiss financial services company UBS AG (UBSN) seems to be of a similar opinion, with
Bloomberg Businessweek reporting that Chen Li, UBS’s head of China equity strategy recently said in an interview that growth would boom in the third quarter, whereas the Shanghai Composite Index was projected to jump 20 percent by the end of the year. Mr Chen Li therefore recommends that investors buy machinery makers and property developers on prospects that the economy will start to rebound.

There are, however, more pessimistic predictions about China’s stock markets as well, with one of them being the opinion of Chen Ruiming, an equity strategist at Haitong Securities (600837), China’s second biggest brokerage by market value. As quoted by Bloomberg Businessweek, Mr Chen Ruiming expects the Shanghai Composite Index to decrease by 6 percent. “We are cautious on the market and there won’t be too many investment opportunities this year,” he pointed out in an interview.

And while market specialists are divided in their opinions as to the future of Chinese stocks, it seems that Mr Guo is not distracted by concerns about market weakness, which, according to the FT, analysts find reassuring. Even Mr Chen Ruiming seems cautiously optimistic about the reforms, despite the prediction that economic worries are going to push stocks lower in the coming months. “The stock market will only play a more and more important role in allocating capital and raising financing in China. The government is very focused on this,” he says, as quoted by the FT.


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