1. Stocks surge on trade thaw hopes, manufacturing data
China stocks are red hot. The benchmark Shanghai Composite Index has risen 5% just in April, and over 30% since the start of 2019. The Shenzhen Component Index is up over 40% this year. Compare this to 2018, when A-shares were among the world's worst performing.
- We see three big things driving the bulls:
- optimism over trade war negotiations
- signs that a string of supportive measures unleashed since mid-2018 are starting to bolster the economy, as indicated by upbeat March PMI data
- the expected effect of 2 trillion yuan in tax and fee cuts, which should be rolled out over the rest of the year
- We're inclined to be cautious on the first two drivers. A single month's PMI data doesn't mean China's slumping industrial activity has really bottomed out. And while U.S.-China relations seem to be looking up, there's no sense putting much faith in this, after a rollercoaster few months. It's also unlikely a deal will really put to rest the issues driving bilateral tensions.
- But the government is serious about increasing support for business. More targeted cuts to banks’ reserve requirement ratios, and faster IPOs for small and medium-sized businesses, are some of the latest measures mentioned in a Sunday policy document.
- Two sectors we're watching where government policies could make or break this year are automobiles and pharma:
- After car sales dropped for the first time in nearly three decades in 2018, and with subsidy support for new energy vehicles fading, manufacturers will be uncomfortably dependent on the effectiveness of new measures to spur consumption.
- And a recently introduced bulk procurement mechanism for hospitals has hacked away at pharma companies' price negotiating power — much now depends on how further rollout is handled.
Send us an email at email@example.com if you'd like more analysis on likely trends in these sectors.
2. China's Nasdaq on the fast track
Since Xi Jinping's surprise announcement last November that China will build a new registration-based high-tech board, the project has been moving lightning-fast.
- The securities watchdog (CSRC) drew up the rules for the board on March 1
- By March 29, the first three firms had got feedback, just 5 working days after applying
Compare this to a previous attempt at an innovation board, the ChiNext board in Shenzhen.
- CSRC took over a year to draw up rules, and nearly 6 months to start vetting the first batch of candidate companies
- Shenzen Stock Exchange took 20 days to give feedback to applicants