All’s not lost for Chinese stocks, says HSBC

There’s still a way to boost investor confidence.

Although the Chinese stock market has been off to a bad start in 2016, a report by HSBC noted that all is not yet lost for battered A-shares.

"The stock market's difficult start to the year has raised concerns among investors, with state intervention in the A-share market attracting criticism that the authorities are standing in the way of further market-oriented reforms. But we don't think it is time to be overly bearish on China. While it is easy to talk about the doctrine of free markets, it is much harder to strike the right balance between reform, development and stability, which is what China is striving for," HSBC said. 

HSBC expects the volatility spike to be temporary. The report noted that leverage has come down sharply, while sentiment and liquidity has improved because of state intervention.

"We expect the supply of new shares to be kept in check and many reform measures in the pipeline are positive catalysts," said HSBC.

Here's more from HSBC:

Having said that there is no doubt that state intervention has come at a price - an estimated RMB2trn to intervene in the A-share market and a decline of over USD500bn in foreign exchange reserves over the past six quarters.

However, the reality is that it would not have been possible to deleverage the domestic equity market in a couple of months without state intervention - as happened last year - given the leverage in the form of margin financing, OTC financing and equity swaps, which peaked around RMB6trn in June.

Volatility on the SHCOMP and ChiNext index is back to pre-crash levels, helped by lower leverage and efforts to build a robust institutional framework. Market liquidity and sentiment have also improved. For instance, the number of new individual A-share accounts being opened has tripled and the percentage of active trading accounts has also doubled from recent lows. More importantly, Chinese leaders have responded to crisis by reaffirming the financial reform agenda announced in November.

For instance, Beijing has promised to improve co-operation and co-ordination among financial regulators, further promote the two-way opening up of the capital markets and eventually abolish the quota system for investing in securities inside and outside the country. Lastly, the IPO registration reform trial will launch in March and the Strategic Emerging Board will be rolled out in Shanghai this year.