Reasons for Growing Optimism in the Chinese Stock Market in Q1

[Asia Economy Reporter Oh Ju-yeon] There is an analysis that the Chinese stock market is gaining attention following the US-China Phase One agreement. Although it had been stuck in a box range since May last year due to the G2 trade conflict, a breakout movement from the box range has appeared since the end of last year as expectations for economic recovery grew. In particular, since the US stock market, which hit an all-time high at the end of last year, is already burdened by valuation concerns, it is also diagnosed that this could be an opportunity for the Chinese stock market.

[Image source=Reuters Yonhap News]

Hana Financial Investment forecasted that the Chinese economy this year will see a recovery trend similar to that of 2016. The basis for this includes a rebound in infrastructure investment, confirmation of the export economy bottom, and recovery of the inventory cycle.

Researcher Kim Kyung-hwan said, "Since 2018, China's infrastructure investment has experienced a hard landing, but we do not consider this as a trend and expect it to recover to a normal level in 2020."

Infrastructure investment in 2020 is expected to improve significantly both in terms of the central government's stance toward local governments and technical aspects. This year, the total amount of special bonds and early issuance are expected to increase by 44% and 23% year-on-year, respectively, and by forcing 70% of the first half's fund execution into the infrastructure sector, the actual net increase in infrastructure investment is expected to rise by 140% year-on-year. Accordingly, infrastructure investment is projected to increase by 8.5% annually (compared to 3-4% in 2019) and show a clear pattern of high in the first half and low in the second half.

The export economy is expected to turn to an increasing trend due to last year's base effect and expectations for the US-China agreement. In particular, the second phase of the US-China trade negotiations is expected to be a game favorable to China, and the yuan exchange rate is expected to return to the 6-yuan range in the first half of this year.

Researcher Kim said, "We believe that the Phase Two agreement will resume before the second quarter due to the necessity of both countries," and predicted, "This trade war is accelerating the opening of China's financial market, and the financial market worth about $49 trillion and the asset management market worth $20 trillion will be opened to overseas institutions."

Additionally, the inventory cycle, which is expected to rebound for the first time in three years, is one of the reasons for the positive outlook on the Chinese stock market.

Researcher Kim said, "2020 may exceed expectations due to the overlap of the bottom of facility investment (9 years) and inventory investment (3 years), the stability of real estate, and the base effect," adding, "The inventory cycle has passed an average of 40-46 months, far exceeding the historical cycle period (average 36-39 months), and a cyclical rebound is imminent." The rebound in the first half is expected to be led by infrastructure investment, real estate, some automobile sectors, and export value chains.

He noted, "We focus on confidence in the economic rebound in the first quarter, the maintenance of policy stance supporting the rebound in the second quarter, and the resumption (and results) of the US-China Phase Two agreement," and forecasted, "US-China relations and the Phase Two agreement will depend on the Taiwan election in January, the expiration of Huawei sanction waivers in February, and the Chinese government's negotiation willingness after the Two Sessions in March."

Accordingly, the expected index bands for the first half of the year were presented as 3050-3480 points for Shanghai and 9500-12,300 points for the Hong Kong H-Share Index.

This content was produced with the assistance of AI translation services.