Spring time in China

May 27, 2015

The Shanghai Composite share index (SSE) continues to build on the gains of the past year with an 8% rise in May to date. Despite Chinese economic data continuing to run softer than forecast across most sectors of the economy, the SSE has reached a fresh seven year high.

The gains have been due to monetary policy easing, freeing up of extra capital through a 100 basis point reduction in the reserve ratio requirement for banks, easing of credit borrowing controls and increased money flows as a new trading link with Hong Kong commenced. The government also continues to unveil a number of initiatives ranging from infrastructure projects to lowering import duties in a bid to promote spending and growth.

China has become a surging bull market with a 138% appreciation over the past year. Concerns remain with the increasing credit risk around real estate, the shadow banking system and local government debt. A more objective view over the seven years shows Chinese shares flat to lower for six years before the current rally that commenced in mid-2014.