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The importance attached by China’s policymakers to the financial sector, which can be seen from capital injections into the stock market and efforts to better balance market innovation and regulation, is conducive to the long-term stability of the A-share market and the high-quality development of public companies, said experts.
Their comments echo a recent speech made by President Xi Jinping, who is also general secretary of the Communist Party of China Central Committee, in which he stressed upholding the fundamental principle of finance serving the real economy.
A diversified and professional system of financial products and services should be built, and market-oriented financial innovation and development must be constantly promoted under the rule of law, he said.
Xi made the remarks at the opening ceremony of a study session attended by provincial and ministerial-level officials on Jan 16, themed on promoting high-quality financial development.
In a note to its clients circulated on Monday, analysts from world-leading bank group UBS estimated that the net capital inflow into the A-share market made by the “national team”, such as Central Huijin, an arm of China’s sovereign wealth fund, may have exceeded 410 billion yuan ($57 billion) from the beginning of this year to Friday. Purchases of exchange-traded funds are the major source of capital inflow.
As a long-term investor, the “national team” is “very unlikely to reduce holdings in the near future”, wrote UBS analysts. Compared to the 1.24-trillion-yuan “national team” holdings for A shares at the end of the third quarter of 2015, a historic level, there is still potential for it to increase its A-share exposure under extreme conditions, they said.
The benchmark Shanghai Composite Index shed 1.91 percent on Wednesday and the Shenzhen Component Index closed 2.4 percent lower. But the trading value at the Shanghai and Shenzhen bourses exceeded 1.3 trillion yuan, up 35 percent from a day earlier.
Analysts from Shanghai-based financial services provider Noah Holdings find this volatility reasonable, as the A-share market rebounded recently.
The Shanghai Composite Index has surged nearly 4.5 percent since trading resumed after the Spring Festival holiday on Feb 19, mainly boosted by better-than-expected consumption data in the Chinese New Year, improving market liquidity and the artificial intelligence boom.
While fluctuations may not be avoided, it can be said that the A-share market is gradually bottoming out amid a marginal improvement in companies’ profitability, they said.
More important, the China Securities Regulatory Commission has responded in a timely manner to investors’ concerns over corporate governance, returns to shareholders and reform of the trading mechanism.
Investors’ outlook and their risk appetite, which were the major factors dragging down indexes in the previous months, have improved significantly, they added.
One example raised by the Noah Holdings analysts is the tighter grip over quant trading, a relatively novel trading method using mathematical models and programs to replace human beings to analyze stock prices and make investment decisions.
The Shanghai and Shenzhen bourses said in announcements on Feb 20 that they will strengthen the monitoring and analysis of quant trading, especially high-frequency trading, in terms of mechanism, market entry, trading activities, information and institutions.
The CSRC held a symposium on Tuesday on the completion of the capital market mechanism and consolidation of the rule of law. Participants in the symposium suggested that lawmaking or legislative amendments should be accelerated regarding the supervision of public companies, securities firms, investment funds and bonds.
CSRC Chairman Wu Qing said at the symposium that the rule of law should play a greater role in the high-quality development of the capital market by consolidating its basis and stabilizing expectations.
As reported by China Securities Journal on Feb 22, the CSRC said it would introduce new regulatory policies on quant trading gradually and at an appropriate time.
Yang Delong, chief economist at First Seafront Fund, said that the efforts to optimize the trading mechanism and strengthen supervision will help improve the A-share market’s transparency, trustworthiness and activeness. Such efforts are conducive to the sound and sustainable development of the Chinese stock market.
He suggested that regulators should also step up supervision over intermediaries such as sponsors and accounting firms to ensure they fulfill their responsibilities. Supervision over public companies’ market valuation management should be strengthened to improve the competitiveness of A-share companies and their investment value, he said.
Qin Peijing, chief strategist at CITIC Securities, said improvement in the investment mechanism will be an important theme for capital market reform in the following years. The A-share market is likely to enter a recovery trajectory which is mainly driven by the market’s endogenous power, he said.
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