Dim Sum Express

Given the rise in the A-share market since the start of last week, we find it meaningful to assess whether the three factors we have identified as supportive of short-term market optimism can be sustained.

    I. Liquidity improvement in Jan Towards the end of 2016, many investors grew concerned about the continuation of tight liquidity this year given last year’s general atmosphere of financial deleveraging. In contrast, we expected to see a short-term improvement in liquidity in 1Q17 compared with 4Q16, which has been confirmed by the substantial decline in 7-day interbank rate during the first week of Jan. With both corporate and household cash withdrawal demand increasing towards the Chinese New Year, we think it is crucial to see if the PBoC will inject sufficient liquidity into the system prior to the holiday. While the central bank drained a net Rmb595bn from the open market last week, if it achieves net injections in each of the following weeks leading up to the CNY driving further declines in market interest rates, our optimism on the market can be further confirmed.

    II. Forex purchases by residents will be lower than generally expected Despite market concerns about Chinese residents rushing to buy foreign currencies once the forex purchase quota for 2017 becomes available in Jan, our judgement has been that the scale of both resident forex purchases and overall capital outflows in Jan might be smaller than generally expected. Based on the surge in the Rmb exchange rate on Jan 4 and 5, along with the latest tightening of resident forex purchase restrictions, we think it is safe to say that there has not been a rush to buy foreign currencies. Our optimism can be further supported if the Rmb exchange rate remains stable or even picks up again in the near term.

    III. Key investment themes will emerge to drive overall market strength We think that for any investment themes to be able to drive overall market strength, they will need to have a relatively long-term investment horizon and involve stocks with a sufficiently large total market cap to attract the volume of investor funds needed to move market indices. While any clear investment themes are yet to be formed in the A-share market at this point, we see “industrial product price growth” (strengthening environmental regulation, decapacity and destocking are all long-term trends) and “reform” (agricultural supply-side reform and SOE reform are likely to be the dominant reform efforts this year) as two potential themes that match the two criteria above.