MNI: Weak Yen Boosts A-shares, Solid Fundamentals Needed

The weak yen has driven offshore capital into the A-share market, however, further support will require authorities to strengthen economic fundamentals and provide greater easing measures alongside the already revealed policies to encourage dividends and attract long-term funds, advisors and analysts told MNI.

Dong Zhongyun, chief economist at AVIC Securities attributed the month-end A-share rally to capital seeking safe-haven assets flowing out of Japan amid yen depreciation. Improvement of China’s fundamentals will decide whether investors hold, he added. “Low valuations, and room for economic rebound have made A shares a good choice,” he told MNI. “But the market has not yet formed a solid expectation for recovery given the weaker-than-expected March macro data."

Moves on the Shanghai Composite Index were weaker than anticipated immediately following the stronger-than-expected 5.3% Q1 GDP, or the release of Beijing’s nine-point guideline aimed at tighter supervision and higher quality listing rules last month. The index, however, had gained some momentum from northbound inflows, finishing April above 3,100 points, its highest level since September.

The 4.2% nominal Q1 GDP, dragged down by low inflation, has had a greater impact on the equity market, Dong noted, adding any rebound in prices will support A shares.

The market is awaiting further monetary easing following repeated People’s Bank of China comments on its toolbox and the Ministry of Finance’s latest statement to support the central bank's treasury trades in open market operations, alongside further real-estate stimulus and the implementation of measures to encourage dividends and delistings pledged by the new guideline, he continued.

“A slow bull market is possible should expected policies prove to be effective,” he added.

Wang Changyun, professor of finance at Renmin University, told MNI the adjustment of U.S. stocks also impacts A shares, noting rate cuts by major Western central banks will help move international capital and lift Chinese equity.

LONG-TERM FUNDS

Facing a lack of incremental funds, Wang believes authorities will likely relax regulatory requirements for the allocation of equity assets by insurance companies, social security and pension funds, after the new guideline called for the promotion of long-term capital.

Authorities should moderately increase the equity investment ratio of insurance companies to ensure solvency and lower the risk factors for insurance firms holding equity assets with high dividends and low volatility, Wang suggested.

By end-2023, the balance of insurance funds invested in stocks was about CNY2 trillion, accounting for only 7.1% of total investment, data by the National Financial Regulatory Administration showed.

Dong expects authorities will also enrich the types of investable assets for public funds and optimise the long-term assessment mechanism to reduce the impact of short-term market fluctuations on performance. The U.S. and Japan’s equity funds account for over 30% of total market value, compared to China’s 3.8%, leaving significant room for improvement, he added.

However, ANBOUND think tank Analyst Wei Hongxue said risk aversion is the main obstacle faced by long-term funds entering the market, while increasing their A-share holding proportion amid high volatility could harm financial stability. He believes the expected improvement in market order and increase in dividends following the new guideline will help attract additional funds.

HIGH DIVIDENDS

Under the new guideline, companies listed on the Shanghai and Shenzhen mainboards that fail to distribute 30% of their profits and pay total dividends less than CNY50 million over a three-year period will be given an “ST” or special treatment tag that could make them less attractive to investors.

The SCI has hovered near 3,000 points since 2007, which has left a negative impression on investors, Wei added, suggesting companies that failed to pay dividends for a long time should be disqualified from the index as a deterrence.

Though encouraging high dividends can help attract investors and boost stock prices, Wang also noted regulators’ excessive demands for high dividends may not necessarily be conducive to some growth companies, while profits and dividends tend to concentrate in a small number of leading companies in global capital markets.