China still has a lot of ammunitions in its armory to fight the downturn in the equities market, according to a Goldman Sachs strategist, reiterating his view that the CSI300 index of the biggest firms listed in Shanghai and Shenzhen will rise 27% over the next 12 months, Bloomberg reported.
“It’s not in a bubble yet,” Hong Kong-based Kinger Lau, the bank’s China strategist, told Bloomberg in an interview Tuesday. “China’s government has a lot of tools to support the market.”
According to Bloomberg, Lau made his forecast for the CSI 300 index, which has fallen 27% from its peak, on July 1. Since then, Chinese equities continued to fall despite efforts by the government to curb the selloff through a rate cut, a reduction in the reserve requirement ratio of banks, pouring funds into the market, suspending IPOs, among other measures.
Lau’s view about the bubble in Chinese stocks contradicted most of his peers and other pundits. Former Morgan Stanley Asia chairman Stephen Roach told CNBC in an interview Tuesday that China’s “bubble is bursting.” Roach further said any effort to seek for bargains in China would be akin to “catching a falling knife.”
But Lau’s view that China still has a lot of aces up on its sleeves to support the market jibed with the strategists over at Bank of America Merrill Lynch.
“(T)he government still has a few policies up its sleeve: it may get affiliated funds such as Huijin and the pension fund to buy, CSRC may suspend IPOs, insurance companies may be encouraged to enter into the market, MoF may cut stamp duty on stock transactions, and PBoC may announce more easing measures, among other possibilities,” BofA Merrill Lynch strategists David Cui, Tracy Tian, and Katherine Tai wrote in a research note dated July 3.
But whether or not these measures would arrest the downward spiral is another matter, they said.
“However, whether or when these policies can stabilize market sentiment is highly uncertain in our view – margin call pressure from unauthorized margin facilities appears enormous; even for those investors not under any immediate margin call pressure, they need to be convinced that the market will go up meaningfully for their leveraged positions to break even (due to high funding costs).”
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