China’s A-H share gap widens


The bullish sentiment onshore comes amid expectations of state support
Chief Investment Office10 Sep 2019
    Photo credit: AFP Photo


    MAINLAND CHINA & HONG KONG

    Mainland Chinese stocks are outperforming their offshore-listed peers as domestic investors bet the country’s economy will withstand the trade war with the US.

    The Shanghai Composite Index has rallied more than 21% this year, compared with a 4.3% advance by the Hang Seng China Enterprises Index in Hong Kong. The Shanghai measure is trading near its highest level relative to the H-shares gauge since late 2017.

    The bullish sentiment onshore comes amid expectations of state support ahead of the 70th anniversary of the People’s Republic of China (PBOC) on 1 October – even as foreign traders grow pessimistic in the face of a slowing global economy and a sliding yuan. After markets closed on Friday (6 September), the central bank lowered the amount of cash banks must hold as reserves to the lowest level since 2007.

    The Hong Kong market is more sensitive to flows of foreign funds, which will pull out of Emerging Markets amid global uncertainty. Such sensitivities have not deterred bullish onshore investors from snapping up shares in Hong Kong’s stock market for 37 straight days as of Monday, the longest stretch since late 2017.

    The latest easing may help sustain gains. The reserve requirement ratio for all banks will be lowered by 0.5%pts, taking effect on 16 September, PBOC said Friday. The PBOC also cut the reserve ratios by one additional percentage point for some city commercial banks, to take effect in two steps on 15 October and 15 November.

    The onshore gains defy a depreciating yuan that has weakened 3.5% this year. It fell past the key 7.00 per dollar level amid an escalation in the trade war. It is not all gloom for H-shares. China’s A-shares are now nearly 30% more expensive than their Hong Kong-listed peers. – Bloomberg News.

    The Shanghai Composite Index climbed 0.84% to 3,024.74 while the Hang Seng Index slipped 0.04% to 26,681.40.

     

    REST OF ASIA

    How low can the Bank of Korea (BOK) go? Will it join the club of central banks with interest rates at or very near zero?

    With the BOK looking increasingly likely to lower its benchmark interest rate again in response to a deteriorating economy and global outlook, these are some of the questions economists are asking. The rate is already sitting at 1.5%, only a 0.25%pts above a record low.

    Economists have judged 1% to be the BOK’s “effective lower bound”, or the point at which lower rates would be no longer effective. But the BOK and Governor Lee Ju-yeol have never specified a level, and many BOK watchers have started to question whether 1% is the floor.

    The limits of interest rate policy are coming into focus worldwide as the global economy slows, given that many benchmark rates remain well below long-term norms. Bank of England (BOE) Governor Mark Carney recently said the effective lower bound for the UK is a little above 0% – not far away from the BOE’s current policy rate of 0.75%.

    The Reserve Bank of Australia’s (RBA) Philip Lowe said he sees the RBA’s limit close to the levels reached by peers such as Canada and the US after the Global Financial Crisis: around 0.25-0.5%. The RBA’s benchmark is now at 1%.

    As a country without a major global currency, the effective lower bound for Korea is higher than for those nations with a major currency, Lee said after holding rates last month. With the benchmark rate at 1.5%, the central bank does have some policy room but less so than before, and cutting rates below the lower bound requires caution, Lee said.

    The BOK in July said the potential growth rate is now 2.5-2.6%, down from 2.8-2.9%. The economy is expected to grow about 2% this year, the least since the Global Financial Crisis. – Bloomberg News.

    Australia’s S&P/ASX 200 Index slipped 0.19% to 6,635.40 at the open on Tuesday (10 September). It strengthened 0.01% to 6,647.96 the previous session.

    South Korea’s Kospi Index surged 0.35% to 2,026.67 early-Tuesday morning. It added 0.52% to 2,019.55 the previous session.

    The Taiwan Stock Exchange Weighted Index (Taiex) rose 0.19% to 10,801.14.

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