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China sees red this week

China markets saw its worst weekly loss since 2008. Naturally, fears of a sharp correction was renewed.

Shanghai China
Source: Bloomberg

The CSI 300 Index and China A50 plunged 13.1% and 12.4% respectively this week.

Much of the tumble can be traced to concerns over drying liquidity owing to IPO subscriptions.

However, what is more pertinent will be sustained efforts from the authorities to rein in excessive speculations.

To be sure, the Chinese government wants a higher stock market as they see that to be beneficial for the economy. More importantly, however, they are looking for a healthy and stable bull market.

This explains why we are seeing China implementing tighter measures in margin financing and continuing to work on liberalising the domestic capital markets.

The latest news is that the China Securities Regulatory Commission (CSRC) is looking at margin trading risk management rules for securities companies, according to 21st Century Business Herald.

At this point, it may be difficult to tell if the correction will go deeper, but the large decline this week may actually be positive for Chinese stocks. Worries over high valuations of smaller-cap counters would be assuaged to some extent as the prices retreat.

In addition, the looser monetary policy tone has not changed. With the economy still remaining relatively sluggish, expectations are still for further cuts in the reserve requirement ratios and interest rates.

In the short to medium time frame, the large correction may herald a consolidation phase for the next few weeks to a couple of months, as investors grapple with the new ‘normal’ of tighter margin debt and increased IPO activity. If you look at a longer time horizon, the China market remains bullish as the government is likely to act on excessive price movements in either direction.

On another note, I continue to see a strategy of buying H-shares based on the view that the gap between A- and H-shares will narrow at some point, judging from historical behaviour. This call appeared to have gained momentum recently. While the A-shares have taken more hits today, we saw good demand in H-shares, which helped push up the Hang Seng Index.

The difference between the A- and H-shares had narrowed to around 30% on Friday, from a high of 42% seen last Wednesday 10 June. Meanwhile, the average premium over the last five years stands at 3.5%, which suggests that there is still room for more upside in H-shares.

In Singapore, the Straits Times Index remained supported above the key 3300 level, helped by the relative positive mood across most of Asia (except China). Jardine Cycle & Carriage came under more pressure on Friday, after it announces a 1-for-9 rights issues to raise USD 772 million to pay down debt.

The counter has fallen over 9% so far in June. Banks were rather steady today, although they are not looking particularly stellar, with the three local banks ending the week in red.

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