By Clement Tan and Lu Jianxin
HONG KONG/SHANGHAI, July 23 (Reuters) – Reluctance by the People’s Bank of China to expand money supply in the world’s second-largest economy too rapidly could condemn the country’s stock markets to a third straight year of losses in 2012.
A congested initial public offering (IPO) pipeline is likely to aggravate tight liquidity conditions as Beijing, wary of reigniting inflation, sticks to its “prudent” monetary policy.
In addition, around 500 billion yuan ($78.5 billion) worth of share lockups are set to expire later this year, which could further weigh on the market. The total market capitalisation of Chinese A shares is currently around 22 trillion yuan ($3.5 trillion).
Onshore Chinese markets have completely surrendered gains made earlier in the year, retreating in response to Europe’s debt crisis, economic slowdowns at home and abroad and a recent flurry of corporate profit warnings.
Major benchmark indices such as the Shanghai Composite Index and the CSI300 Index of the top Shanghai and Shenzhen listings have already posted two consecutive annual losses, giving up a third of their market value in the process.
“There is still a strong likelihood for the index to close the year in the positive territory, but the opposite has now become a realistic possibility as well,” said Zheng Weigang, a senior trader at Shanghai Securities.
In a report on Monday, Credit Suisse said the latest reading of its Chinese Whispers A-share Market Sentiment Index hit its lowest level since the survey was instituted in June 2011.
Credit Suisse strategists added that onshore Chinese markets may not have bottomed yet.
Despite two interest rate cuts and two reductions in the bank reserve requirements this year, the two major benchmark indices are down more than 10 percent from May highs.
“Investors need to realize that Beijing’s monetary policy is geared to address the slowdown in the real economy and not just to support the stock markets,” said Hong Hao, chief equity strategist at Bank of Communications (BoComm) International Securities.
SOME SMALL STEPS
Regulators have taken some modest steps to boost equities markets, including encouraging investors to buy large-cap “blue chip” shares instead of speculating on smaller companies. The CSRC has also reduced transaction and supervisory fees.
So far nothing has consoled investors, who have continued to agitate for a freeze on IPOs, a move regulators have used during past market slumps. A petition circulated online to that effect was publicly rejected by the China Securities Regulatory Commission (CSRC) on July 13.
The regulator moved to allow eight companies to kick off IPO processes last week, including a 1.15 billion-yuan ($180 million) Shanghai offer by China First Tractor Co Ltd.
The Shanghai Composite Index sagged to near its lowest level of the year after the decision, before regaining some ground amid signs that government-linked institutional investors, such as the Central Huijin, were buying into large-caps to support the market.
“Investors were hoping that regulators should at least let them take a breath after consecutive falls since early May, when it first became clear signs that China’s economy is performing worse than expected,” said a trader at a Chinese brokerage in Shanghai.
POLICY LOOSENING
The PBOC has been resisting calls to sharply reduce bank reserve requirements this year, instead resorting to short-term open market operations to maintain liquidity.
This has frustrated those who play equities, as Chinese stock markets tend to track monetary policy more closely than GDP growth or company earnings.
Money supply growth has slowed sharply this year to an annual 13.6 percent in June compared with 15.9 percent in June 2011, while China’s money markets have been stressed by bouts of short-term liquidity tightness.
In a note to clients on Monday, strategists at China International Capital Corp (CICC) said the final window for policy loosening this year may occur in late July to early August, with policymakers seen as reluctant to make any bolder moves later in the year during the country’s sensitive leadership transition.
“Whether the PBOC will lower RRR at end-July is of great importance to soothing the A-share market expectations,” CICC strategists said in the same note.
“If the PBOC turns to less efficient hedging instruments such as reverse repos instead, investors will doubt the central bank really wants to see a money and credit growth rebound.” ($1 = 6.3735 Chinese yuan) (Editing by Pete Sweeney & Kim Coghill)
This story was first published at Reuters.com.