China asserts its will to be a regional and global leader

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In their monthly Asian markets’ note, La Française and JK Capital Management highlighted that May was a very interesting month in Asia and particularly in China.

May was a very interesting month in Asia and particularly in China where reforms carry on at an unprecedented pace and announcements of new measures or progress are almost done daily.

While South East Asia is showing some signs of weakness, China is asserting its will to be a regional and global leader with clear goals set out for the year.

A and H May stock performance:

The extraordinary performance we saw in April on the Hong Kong stock market triggered some profit taking, particularly on large caps including those with A/H dual-listings.

However it did not stop a strong flow of buy orders for mainland Chinese A-share mid-caps which tend to be more retail-driven.

This explains:

– the discrepancy between the Shanghai A share market performance in May (+3.8%) and the Hang Seng China Enterprise Index/MSCI China Index that measure H shares (-2.3% and -3.9% respectively),

– the drop of the A/H premium from 31% at the end of April to 25% at the end of May despite the strong performance of the A share market (since most mid-caps do not have dual-listings),

– the intervention of China’s sovereign fund which decided to cool down retail speculation by selling RMB6.8bn worth of shares in China Commercial Bank and RMB5.4bn worth of shares in ICBC, triggering a 6.5% drop in the Shanghai index on 28th May.

If anything, it confirms that the Chinese authorities remain on the watch and ready to step in as they wish.

The message from Beijing has been very clear over the past few months: The central government wants the equity market to be a steady performer without exuberance, at a time when financial reforms are moving ahead at full speed.

The A share markets:

A strong divergence appeared among Chinese markets highlighting, if need be, the difference in investor base of the Hong Kong H share market and the Shanghai and Shenzhen A share markets.

The institution-driven Hong Kong market drove the MSCI China down by 3.9% in May when the retail-driven Shanghai market saw its Composite index gain 3.8%.

More spectacular was the technology-driven Shenzhen market that saw its Composite index gain a staggering 23.3% ahead of the launch of the Shenzhen-Hong Kong Stock Connect Program which will allow foreign capital free access to certain Shenzhen exchange listed stocks like the Shanghai-Hong Kong Stock Connect did late last year.

Even though it can sometime be described as highly speculative, the Shenzhen Stock Exchange has been regarded as an exemplary multi-level structure for Chinese capital markets, and serves a critical role for small to mid-sized companies to raise capital.

Consisting of:
A main board (480 companies with a total market cap of Rmb9.1tn),
A SME board (749 companies with a total market cap of Rmb11.1tn),
A GEM board (458 companies with a total market cap of Rmb5.9tn)

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