Market Reforms a Game Changer for China Stocks

Recent market reforms announced by the Chinese authorities are proving to be a game changer for the country’s stock market, with the Shanghai Composite index breaking above its 200-day moving average on Wednesday.

An investor smiles at a stock exchange hall on August 10, 2011 in Shenyang, Liaoning Province of China.
ChinaFotoPress | Getty Images
An investor smiles at a stock exchange hall on August 10, 2011 in Shenyang, Liaoning Province of China.

Equity analysts tell CNBC that the sentiment boost from government measures is going to propel the Shanghai market higher this year, by another 15-30 percent.

“The government is clearly nervous about how weak that market has been. The government is clearly behind the A-share market rebounding, and like you don’t fight the Fed in the U.S., in China you don’t fight the government,” Garry Evans, Global Head of Equity Strategy at HSBC told CNBC Asia's “Squawk Box” on Thursday.

Over the past week, the China Securities Regulatory Commission (CSRC) has lowered transaction fees onequity trades, tightened IPO requirements and announced measures to enforce the delisting of unqualified firms.

“The decrease in trading fees is a clear sign that the government is undergoing policy change to support the stock market,” said Dickie Wong, Executive Director, Kingston Securities, who sees further gains of 15 percent for the market this year.

HSBC expects the benchmark index to hit 2,800 by the end of the year, which is also another 15 percent gain.

Chinese stocks, which have underperformed their global peers over the last two years slumping 21.7 percent in 2011 and 14.3 percent in 2010, have begun to stage a turnaround.

The Shanghai Composite, which has risen 10.5 percent year-to-date, broke above its 200-day moving average after trading below it for the past seven months. When an index or stock is above its 200-day moving average, it is considered to be in a long-term uptrend.

Paul Heffner, CEO of investment management firm Gen2 Partners, who forecasts the Shanghai Composite could see a 30 percent upside from current levels, says the index’s move above its 200-day moving average is “extremely positive” for the overall market.

“We have seen technical support coming in, and there are separate policy changes that will be a game changer for the Shanghai market,” Heffner said.

Heffner adds that as the government cracks down on black market lenders — which have attracted a lot of liquidity in recent months because of their attractive interest rates of 10-12 percent — investors will search for an alternative, leading more funds into mainland equities.

“The money has to go somewhere and the viable options are limited. This makes the stock market attractive,” he said.

Wong of Kingston Securities adds that an increase in bank lending will also help drive gains in the market in the coming months. “Bank lending in March sky rocketed, this is a good sign for the equity markets. We expect lending to remain high,” Wong said, adding that he expects further bank reserve requirement cuts of 50 basis points by the end of the quarter.

Heffner says the Shanghai Composite looks attractive on a valuation basis - trading at 10 times price-to-earnings, and below 2 times price-to-book - as well as from an earnings perspective.