Chinese stock investors. Photo: Xinhua

Chinese stock markets have generally maintained an upward momentum since the Spring Festival. In the first 17 trading days of this month, Shanghai Composite Index, Shenzhen Component Index and Growth Enterprises Market Index rose by 1.23%, 10.99% and 18.65%, respectively – with the plunge on February 3 completely offset.

However, Chinese stock markets have contracted over the last few days amid the recent decline in US markets.

Many investors would have asked: How will the A-share markets perform in the short term? Has the up-trend ended? How will markets be affected by the spread of the epidemic?

China’s A-share markets rebounded after the risk-averse sentiment against the epidemic spurred a significant decline on February 3, analysts told Asia Times. The markets also saw support after a series of monetary policies were launched.

On February 3, the People’s Bank of China injected 1.2 trillion yuan (US$174 billion) worth of liquidity into the financial markets through reverse repo operations. It also cut the interest rate of the medium-term lending facility (MLF) loans by 10 basis points to 3.15% and one-year-term loan prime rate (LPR) by 10 basis points to 4.05%. These moves helped lower the borrowing costs for corporates and boost the liquidity in the financial market.

Northbound capital inflows (from Hong Kong) and new issues of mutual funds showed that foreign capital had entered the A-share markets.

The inflow of foreign capital has amounted to 65.78 billion yuan this year as of Wednesday, according to Choice, a financial and stock information platform operated by East Money Information Co Ltd. Between February 3 and 24, the newly issued mutual funds totaled 82.6 billion yuan.

Chen Guo, chief strategist of Essense Securities Co Ltd, wrote in a research report on Sunday that domestic capital, or local mutual funds, had become more influential than foreign capital in the A-share market.

An increase in stock valuations also contributed to the recent surge in A-share markets.

During a sluggish economy, strong stock markets can still happen, according to a research report by Founder Securities Co Ltd. That is because investors have raised their stock valuations, as they believe some sectors will benefit from the government’s supportive measures.

The average price-to-earning ratio of Shanghai and Shenzhen stock markets has risen to 20.87 from 17.72 since Spring Festival while that of Shenzhen’s Growth Enterprises Market has increased to 58.74 from 46.5.

The increase in stock valuations in the Growth Enterprises Market showed that technology stocks were less affected by the epidemic while traditional blue-chips were hurt.

Even if there was not an epidemic, China’s small-and-medium-sized enterprises had entered an upward cycle in their profits while blue chips were suffering from a downward cycle, according to Guosen Securities Co Ltd.

Investors have become bullish on Chinese technology stocks, not only because of the government’s supportive measures, but also because more Chinese consumers have turned to use domestic products after the US imposed sanctions against Chinese tech companies.

“2019 was a blooming year for Chinese technology stocks while 2020 is the time for them to show their profitability,” Liu Gesong, a mutual fund manager, who had heavily invested in technology stocks last year.

Zhou Yingbo, a fund manager at Zhong Ou Asset Management, said on February 21 he would continue to focus on the technology and consumer sectors in a bid to dilute the negative effects of the epidemic on the macro-economy.

But investors should beware of a possible correction in China’s stock markets in the short term as the risk-averse sentiment is growing as the coronavirus spreads around the world, according to a research report published by the wealth management team at China Merchants Bank’s Shenzhen branch.

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