Potentially Heading Back To Stocks Is China’s Giant Ball Of Money

China’s campaign to curb financial risks over the past year have targeted property, overseas investments and shadow-banking products.

But what is the next thing.

What’s often called China’s giant ball of money back into stocks, which, despite steady gains, have seen a slow take up in volumes since a spectacular boom and bust in 2015 will be lured by restrictions on other popular investment channels is what some analysts are betting on. Morgan Stanley predicts that amid policies to clean up the financial system, Chinese equity holdings will swell by up to 11 trillion yuan ($1.7 trillion) in the 2 1/2 years through end-2019.

While also creating the risk of another speculative frenzy, a reinvigorated stock market has the benefit of reducing the economy’s reliance on debt for China. Since the government has had some success in lowering leverage in the financial system and economic data and earnings have improved, there’s a stronger fundamental case for stocks this time around.

“Economic fundamentals are improving, valuations are OK and there’s a global phenomenon of low volatility — that’s why stocks are in an ideal environment to heal,” said Hao Hong, chief strategist at Bocom International Holdings Co., who predicted the market’s peak and trough in 2015. “But to speak of frenzies in stocks again, only two and a bit years away from 2015, it’s probably a little too early.”

As investors seek to dodge the regulatory whack-a-mole, periodic manias in various assets from stocks and homes to commodities and bitcoin are known to be whipped up by China’s growing wealth.

Targeting many of the nation’s most popular investment channels. the government’s campaign to curb financial risks has intensified over the past year. Warnings about excessive corporate debt, signaling such efforts are unlikely to ease, was issued by People’s Bank of China Governor Zhou Xiaochuan.

Thomas Deng, chief China strategist at UBS Wealth Management said that while the wealthy to seek overseas investments, Chinese people who don’t own homes are still likely to prioritize property purchases despite the curbs. Deng added that while bonds’ appeal is their liquidity, domestically, equities are a good choice for wealth growth.

Bocom’s Hong said that China’s retail investors are also taking more notice of improving fundamentals, even though it was they were caricatured in the 2015 bust as “aunties” who ignore data and merely follow headlines.

“Attention is being paid more to earnings quality and also good companies,” he said. “At the end of the day, the incentive to invest in the stock market is driven by not so much by liquidity but by the prospect of economic growth, which has kind of stabilized.”

buying will spread to small caps and both onshore and offshore Chinese markets will keep rallying, he predicts.

“You can say the equity market is one of the only channels through which you can really absorb significant redirected flows,” said Logan Wright, Hong Kong-based director of China markets research at Rhodium Group LLC. “But at the same time if you’re seeing a monetary aggregates slowdown, it’s hard to see why equities are necessarily supported in that environment.”

(Adapted from Bloomberg)

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Categories: Economy & Finance, Strategy

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