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Chinese Market To Normalise; SHCOMP Forms Resistance At 4,000 Points
By: Dr Chan Yan Chong
Articles (200) Profile

US Interest Rates Expected to Rise

With Greece’s debt issue somewhat resolved and an Iran nuclear agreement reached, investors should shift their attention to the US Federal Reserve meeting to be convened on 28 and 29 July. While I do not know the outcome of the meeting – which has yet to pass at the date of this writing – the market is expecting a stronger hint of a rate hike before the year’s end.

Though financial markets should have already factored in the rate hike, some investors still hold on to a remote and unrealistic hope that the rate hike will not happen. Therefore, there will still be a shakeup in the stock market when the rate hike is announced, which may actually present opportunities for investors.

In addition to China A-shares, stock markets in Singapore and Hong Kong have begun to normalise. The raging Chinese bull has been tamed and China’s central government has managed to avert a stock market crash. Going forward, share price movements will largely depend on the performance and profitability of the individual listed companies.

Investors should be mentally prepared for a US rate hike. Although this will not bode well for the rest of the world, the Fed’s talks of a rate hike has gone on for many years now and would eventually need to materialise. If other nations think that the US is just crying wolf, the greenback will depreciate and prolonged currency depreciation is harmful for the US. As such, it is a choice of the lesser of two evils, which prompted Fed chairwoman Janet Yellen to openly say that interest rates will be raised this year.

Government Intervention is the New Normal

China’s stock market is still a semi-closed market, and investors should never try to predict its movements as if it was a truly free market. In fact, after the 2008 financial crisis, which saw the US printing money to buy up stocks and bonds, there is no longer a truly free stock market in the world. Investors must understand that in extraordinary moments, governments worldwide, be it the East or West, will directly intervene in the market. This is the new normal, so do bear this in mind.

17 July was the settlement date of China A-share index futures. On that day, the Shanghai Composite Index (SHCOMP) surged 3.5 percent to 3,994 points, which seems to suggest that the Chinese police has won the first sortie against “malicious short selling”. This is the situation in mainland China, but the battle against short-selling is still unfolding overseas in Singapore.

Singapore’s FTSE A50 Index Futures market has been very active and saw high trade volumes. The settlement date in Singapore is 30 July. The real big players of international institutions will not deal in a tightly-controlled futures market like China’s Shanghai stock market; the real war will be fought in Singapore. I believe these international investors will not cede easily, so China’s stock market will remain volatile before 30 July.

In June, the SHCOMP rose above 5,000 points just as regulatory authorities began to clamp down on off-market margin lending activities. This triggered a plummet in share prices from a five-year high, prompting the central government to intervene and prop up the market. From this, we can infer that the regulators view the 5,000-point level “too high” for comfort. Thus, bailout efforts were calculated such that investors will not be enticed to re-enter the market rashly. With the 4,000-point level forming a resistance for the SHCOMP, it seems that the A-shares market will be taking a breather for a long while.

Strictly speaking, the recent stock market crash was caused by the crackdown by the Chinese government on illegal off-market margin trading, which had forced heavily leveraged speculators to close their positions. Later, some speculators started short selling aggressively as they were betting that the stock market would plummet further. This led to the Chinese government’s crackdown on malicious short selling, after which the stock market finally rebounded.

However, the focus of the media was not on the off-market margin trade, but rather, the bailout efforts and the investigation of illegal short-selling. I believe that the Chinese government has not let down its guard against off-market margin trading. Simply put, the Chinese government is bailing out the market with one hand and thumbing it down with the other. The Chinese government does not wish to see panic in the stock market that causes investors to turn away from the stock market completely. It still wants the stock market to be the place through which firms raise their capital. The current moratorium on initial public offerings is only temporary, and new listings will resume when investors have regained confidence.

The government’s crackdown on margin trading when the SHCOMP rose above 5,000 points was to pre-empt future market crashes of greater severity. The Chinese government must persist at stamping out the unsustainable practice of risky leveraging to allow the stock market to grow healthily.

The benchmark SHCOMP has currently rebounded to stabilise above 3,500 points. Immediately, there are rumours that investors are seeking to recoup their recent losses by returning to the market with highly leveraged margins. Such behaviour is akin to gamblers who borrow money from loan sharks to win back the money they lost. Hence, after the stock market rebounds, I believe attention will turn back onto the issue of off-market margin financing.

Optimistic Outlook in the Long Run

Looking at the crackdown on margin trading and the investigation into malicious short selling, one is bad news for the stock market while the other is good, which balances each other out. Thus, the stock market will go into a period of recovery to allow its residual volatility to taper off. I have repeatedly stressed that one focal point of Xi Jinping’s economic reforms is to foster healthy growth of private enterprises. Private enterprises will require cash to grow and the best source for these funds is the stock market. In the long run, the outlook for the Chinese market remains optimistic.

As August comes, Singapore will be caught up in the nation-wide celebration of 50 years of nation building. There may also be a number of market-friendly incentives being announced. Let us hope that they will be sufficient to cushion Singapore from the ill effects of the stock market crash in China and the looming rate hike in the US.

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Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

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