The Chinese stock market continues to slide with the Shanghai Composite (SHA:000001) suffering its biggest one-day decline in 5 months.
Morgan Stanley cited four issues which are causing this: increased equity supply, weak earnings growth, high valuations, and slowing investment.
The recent turbulence in China’s stock market raised concern among investors. Capital is increasingly flowing toward precious metals such as gold. Gold imports into China have also seen a brisk rise.
Data from the Hong Kong Census and Statistics Department shows a rise of 36% month-on-month and 35% year-on-year on gold imports via Hong Kong. This is the highest level since January.
Capital Economics expects China’s gold demand will be strong this year too, rising by 8%.
“We think investors are becoming increasingly worried about a more pronounced correction in the Chinese stock market and will return to gold to diversify their portfolios,” said Simona Gambarini, commodities economist at Capital Economics.
Although the Shanghai Composite Index has been on a roller-coaster ride, it’s still up since the beginning of 2015. The index rose by over 60% from March until the middle of June, ranking as one of the best performing in the world.
“Chinese Stock Market? Don’t Worry” – Morgan Stanley
Stephen Roach, former chairman of Morgan Stanley in Asia, said that people should “never mind the wild swings”. He stated in a recent interview with CNBC that if he had to invest in just one market in the world, it would be China.
“Markets around the world are really rich. I think if the Chinese market corrects a little bit more from here, it would be my first choice,” said Roach.
Roach explained that the mismatch between the small macro-economic impact and China’s sizzling stock market comes down to liquidity. The People’s Bank of China (PBOC) took measures to maintain liquidity by lowering the reserve requirement ratio for banks.
However, opinions still remain divided. Morgan Stanley made it clear that they think investing in China isn’t a good idea right now.
“Our stance on China A-shares is that this is probably not a dip to buy. In fact, we think the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and Chinext has now taken place,” reported Morgan Stanley.
The bank estimated a target price range of between 3,250 and 4,600 for the Shanghai Composite Index. This represents a rise of 10% in the best case scenario, and a slide of 22% in the worst case scenario.
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