On Monday, both Chinese and Hong Kong indices made their biggest advance in seven weeks on news that China was taking steps to bolster the capital markets. The Shanghai Composite Index rose 2.1%, its most since 21 March while the Hong Kong HSI Index jumped 2.2%, its steepest advance since 24 March. Warrant investors sold back close to 20M of HSI calls on the move, as they made gains as much as 76%. Yesterday, while the Singapore market was shut, the HSI increased another 0.4% while Chinese indices dipped 0.1%.

Chin'sa pledge to liberalise markets
On 9 May, China’s State Council pledged to implement policies to improve the quality of and access to the nation’s stock, bond and commodities markets. The government will also relax limits on foreign investment in listed companies and expand quotas for capital flow. Specifically, the quotas for capital flow will be expanded while commodities trading tools will be developed. These measures are a follow-up to last month’s announcement to connect the stock exchanges of Hong Kong and Shanghai to promote trading volumes and the use of the yuan currency.

“Our country’s capital markets have developed very rapidly over the last 20 years, and we have nascent market systems to cover stocks, bonds and futures,” the State Council said in the statement. “Our nation’s capital markets are still immature and some organizational and systematic problems still exist.”

Market needs to adjust to China’s “new normal” 
A day after the above announcement, Xinhua News Agency reported Chinese President Xi Jinping’s comments that the nation needs to adapt to a “new normal” in the pace of economic growth and remain “cool-minded” amid a slowdown that analysts forecast will lead to the weakest expansion since 1990.

China’s growth fundamentals haven’t changed and the country is still in a “significant period of strategic opportunity,”said Xi. At the same time, the government must prevent risks and take “timely countermeasures to reduce potential negative effects.” The Chinese government will continue to balance the relationship between economic expansion, reform, restructuring, improving people’s well-being and preventing risks to ensure sound economic growth and social stability. “We must boost our confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded,” he said.

The International Monetary Fund, which currently expects growth matching the government’s target of 7.5 percent this year however, may lower its forecast, according to IMF’s director of Asia and Pacific division.

China released April data on industrial production and retail sales yesterday. Factory production rose 8.7% in April, down from the 8.8% growth in the previous month and 8.9% that consensus estimated. Retail sales also missed expectations by 0.3% with its 11.9% climb.


How China and HSI indices are performing
Despite the 2% jump on Monday, the FTSE ChinaA50 Index is still 4.9% down this year. Dragged by China, the HSI is similarly down 4.1%. According to Bloomberg, the HSI is currently trading at 10.4 times estimated earnings at its last close, compared with the 16.1 times on the US S&P500.

Prior to Monday’s rally, Chinese indices had been lower for a fourth consecutive week while the HSI was down 1.8% in a week, leading warrant investors to buy 22M HSI calls of which 20M were sold back on Monday.