Kiwoom Securities forecasted on the 26th that the strong trend in the Chinese stock market will continue until the 4th Plenary Session of the 19th Central Committee of the Communist Party of China, scheduled for next October.
Recently, the Shanghai Composite Index has recorded its highest level in 10 years. Park Joo-young, a researcher at Kiwoom Securities, attributed this to three major factors.
First, the geopolitical crisis has eased as the United States and China extended the deadline for trade negotiations by an additional 90 days. China is also strengthening policies to reduce oversupply. Additionally, as the economic indicators in July showed a slowdown, the necessity for China's economic policies has increased.
Park noted, "It is encouraging that the recent direction of China's policies is shifting from production to consumption," adding that "expectations continue for the possibility of additional consumption support policies."
Liquidity is also supporting the market. Weekly transaction volumes and credit balances based on the Shanghai Composite Index have approached their highest levels in the last 15 years. In particular, the potential for household assets to flow into the stock market has increased. The decrease in household deposits in July exceeded seasonal trends.
Park stated, "During the COVID-19 pandemic, Chinese households invested mainly in safe assets such as bonds. However, with interest rates on deposits in China declining over the past two years and the recent rebound in the Chinese stock market, the possibility of household assets flowing into risk assets has increased."
Furthermore, he mentioned, "If the share of stock investments expands to past levels, the waiting funds of household assets in the stock market are estimated to be around 5-7% of the circulating market capitalization of the mainland stock market."
However, since the Chinese stock market has shown a strong trend over the past two months, profit-taking sales may occur around the 3rd of September, just before Liberation Day.
Park also noted, "The trend reversal of earnings based on the mainland stock market has not yet been confirmed, so caution is needed against excessive optimism," adding that "it will be important to confirm policy expectations through the sustainability of liquidity, Chinese 10-year bond rates, and the exchange rate of the yuan."