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A-share crash testing investor confidence in China equities
The massive crash in China’s stock market is testing confidence of domestic and foreign investors many of whom are now eyeing Indian equities and Korean equities as an alternative to A-shares.
Bayani S Cruz 27 Jul 2015
The big crash in China’s stock market is testing confidence of domestic and foreign investors many of whom are now eyeing Indian or Korean equities as an alternative to A-shares.
        
According to Jian Chang, Barclays chief China economist, onshore investor sentiment has clearly been impacted negatively by the market crash which saw A-shares plummet by 30% from mid June. 
 
“The stock market crash and roller coaster ride has hurt investor sentiment especially for retail investors. There are risks of capital outflow not necessarily to Hong Kong but investors are reallocating to US dollar-based assets. Some international investors tend to feel that A-shares is a less than investible market despite the fact that the government has done a lot to stabilize the market,” says Chang.
 
According to Ephrem Ravi, Barclays head of metals & mining and power & utilities sectors, equity research – Asia ex-Japan, earnings growth for India is expected to be 15-20% in 2016 and Korea presents a nine percent potential upside for the KOSPI index.
 
“Brighter times lie ahead for India as the economy gradually revives, as well as for Korea where the MERS scare should be shortlived,” Ravi says.
 
Chang says that China’s overall fiscal and monetary policy mix is expected to stay accommodative in the second half of 2015 although the pace of broad-based monetary easing is likely to slow.
 
“While the significant stock market volatility has complicated monetary policies, we believe the easing bias will continue given the continuing downside risks and the expected large pipeline of local government debt issuances,” Chang says.
 
In the second half of 2015, Barclays expects one benchmark rate cut of 25 bps in the third quarter and one or two RRR cuts of 50bps each.
 
The latest measure intended to stabilize the market was an announcement by China’s State Council on July 24 of seven main policy recommendations aimed at further promoting trade facilitation, improving the business environment for foreign trade enterprises, promoting the steady growth of imports and exports, fostering international competitiveness.
 
The second recommendation in which the State Council announced it will “expand the two-way floating range  of the renminbi exchange rate” is considered the most significant by the market.
 
“We believe this statement is significant, as this is the first explicit mention by the State Council on expanding the floating  range of the renminbi since March 5 2014. Also the language of the statement appears stronger than the usual language used by the PBOC,” Chang says.

    

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