Shanghai Stock Market Is Facing Adjustment After Shanghai And Hong Kong Delays

Shanghai and Hong Kong through delay

The inflow of exchange traded funds has plunged and Shanghai's stock market is facing an adjustment: if investors cleared out two weeks ago due to the global sell-off, they would miss the best performance week in the world stock market in the past two years.

If so, a year's toil will be burned.

Fundamentals can not explain this dramatic market fluctuation.

The sudden drop in liquidity and market sentiment are the main reasons. Please refer to our October 13, 2014 report "focus on the strength of the dollar" and the October 20, 2014 report "inflection point of monetary policy".

Just as many market participants believe that market volatility has become a thing of the past, the VIX index has plunged more than 10% in the past week for three consecutive days, indicating that the market volatility is still unfading.

This week, the Federal Reserve will end its QE3 this week. Europe is still debating whether to expand its quantitative easing plan, and Japan's issue of sales tax and quantitative easing has not yet been finalized.

The overseas market will still be repaired, but it will inevitably be fragile.

In the past few days, the news reported that Shanghai and Hong Kong were delayed and there was no timetable for launching.

Last week, data showed that China's largest foreign exchange reserve was one of the largest in history. Policymakers may be worried about the QE3's impact on the fluctuation of capital flows this week, and postponed the Shanghai and Hong Kong through plan.

The Shanghai stock market has been disappointed by the news that Shanghai and Hong Kong are lagging behind, and this is understandable.

After all, the market thought that the Shanghai stock market's surge was driven by the Shanghai Hong Kong pass and monetary easing.

However, although our research has not found evidence that Shanghai and Hong Kong have made a significant lead in the performance of related stocks, and the proportion of individual stocks in total pactions has even declined, the upward trend of the stock market in the past two months is still undiminished.

Since the market's confidence in Shanghai and Hong Kong is so strong, once the Shanghai and Hong Kong links are expected to reverse, the market will reverse.

Our model shows that whenever the ETF capital flow in the domestic market is increased by US $3 billion, the ETF capital flow in the offshore market is increased by a margin of US $4 billion (as in the early September), the flow of capital will stop and the market will start to callback ("the truth of Shanghai and Hong Kong Tong and the flow of funds", August 22, 2014).

The upper limit of these capital flows is likely to be related to the foreign exchange quotas and volume in each market (focus chart 1-2).

As Shanghai and Hong Kong pass Shanghai quota higher than Hongkong, and Shanghai stock market valuation is relatively low, we thought that as the Shanghai and Hong Kong through the start time is approaching, Shanghai stock market should win Hong Kong stocks.

Shanghai stock market has been leading since early September.

Today, the Shanghai and Hong Kong through plan is delayed, the market expectations will be reversed, and the flow of funds no longer supports the continued repair of Shanghai stock market, and there will be a pullback in the short term.

The adjustment of housing prices will come to an end; monetary policy will reach inflection point: the latest data show that the prices of 69 cities in the 70 largest cities in China have declined for the first time since 2013.

We have always believed that real estate will significantly drag down China's economic growth this year and is a market risk that needs to be monitored.

China has begun to act. Most cities have abolished the real estate purchase order except for the first tier cities.

In September 30th, the Chinese government announced the most active measure to deal with the real estate slowdown since 2008, that is, to reduce mortgage interest rates and to adopt the policy of "recognition of loans and disregard of housing".

From the price cycle perspective, based on the positive policy response, we believe that the adjustment of house prices will come to an end, unless the economy is once again in the bottom of 2008.

In addition, the growth of money supply has dropped to the level of policy intervention in the past (focus chart 3).

At the same time, China's real interest rate has soared to a record high, considering that CPI and real estate prices have gone up.

This situation has generally led to a decline in the deposit reserve ratio and the emergence of interest rate cuts.

However, many people regard the counter cyclical easing policy as a strong stimulus policy, and therefore oppose the relaxation of the conventional broad-spectrum monetary policy.

Many experts believe that as the employment rate continues to rise, there is no need to reduce the deposit reserve ratio or to cut interest rates.

However, our data show that the global employment rate has been soaring since the beginning of 2013, driven by job growth in developed countries, especially in the United States.

Nonetheless, these markets are suddenly facing deflation risk and are considering further quantitative easing.

In other words, the rise in employment does not justification for refusing to ease monetary policy, and the experience of other countries in the world illustrates this point.

In addition, counter cyclical easing policy can not be equated with large-scale stimulus policies.

Although targeted easing has temporarily saved the economy.

However, due to the relatively short duration of some innovative monetary measures such as SLF, these directional easing policies have not been plated into new loans or economic growth. New funds may have found their way into the financial market by themselves, which may be one of the reasons for the recent major differences between the real economy and the stock market.

Therefore,

The risk of activity has been magnified.

For example, the total amount of margin trading has soared to the highest level in history.

When the market is expected to change, the liquidation activities of these leveraged investments will be very rough.

Although the long-term outlook of A shares has improved, its short-term risks can not be ignored.