Friday 29 Mar 2024
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China’s A-share bull run is still intact despite its plunge on Monday (Jan 19) and the Shanghai A-Market is set to rise further after a correction, according to Morgan Stanley Research.

“We think the A-share bull run is intact, although it is likely to proceed at a slower pace from here on,” said Morgan Stanley in its China Strategy report dated Jan 20.

China’s A-share market dropped the most in over six years on Monday following Beijing’s crackdown on brokerages’ margin business and a government proposal to tighten supervision of shadow banking products.

The Shanghai Composite Index dived 260.14 points, or 7.7%, to 3,116.35 in the largest daily drop since June 10, 2008.

“This fall was triggered by the China Banking Regulatory Commission’s announcement [on Jan 16] of stricter regulations on margin financing,” Morgan Stanley stated in its report.

Meanwhile, the China Securities Regulatory Commission has fined 12 brokers for violations of margin lending rules.

Morgan Stanley noted that margin financing had risen sharply recently to 3.5% of market capitalisation, from 2.0% in early 2014. “However, we do not think the authorities are aiming at reversing this ratio but rather its stabilisation.”

The research house argued that the recent bull trend should remain intact as it was induced by reduced returns on other investment assets (property, wealth management and trust products, and bond yields) and the government’s desire to promote the development of the equity market as part of its reform agenda.

It said key reasons for it to believe that the current market fall is a correction include cheap current valuations, possible additional monetary policy easing and lower commodity prices that will have a beneficial impact on corporate earnings. A-share inclusion in the MSCI indices will also have a positive impact on the market.

“The most likely year-end 2015 scenario for the Shanghai A-market, in our view, is an index level of between 4,200 and 5,100,” said the report.

Morgan Stanley, however, has identified two risks: economic risks associated with any further China growth deceleration and uncertainties surrounding margin unwinding.

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