Analysts: Selling pressure possible for markets

Investors in Chinese stock markets will be under mounting pressure to sell if key economic data to be released in April fails to meet expectations and indicates rising inflation is imminent, analysts say.

The concern comes after a robust rebound in the benchmark Shanghai Composite Index recent buoyed by positive signals from financial regulators that the market is stable and that overseas conditions have improved.

However, Xiao Shijun, an analyst at Guodu Securities Co, says investors should watch out for midium-term risks, including concerns over a potential US Federal Reserve rate hike in April. The most important thing to watch for is economic data about China's first-quarter performance, due to be released in mid-April, Xiao says.

"If the data fails to meet investors' expectations ... fears of stagflation (high inflation and slow growth) will prompt selling in the market," Xiao says. "The Fed is likely to usher in a more hawkish tone with its interest rate policy in April. That will again tug at the nerves of global markets."

Hong Hao, chief strategist at investment bank BOCOM International Co Ltd, says factors such as volatility in commodity prices and a worrying divergence in China's property prices could create fears of higher inflation amid a continued economic slowdown.

"While investors may opt for risk-rotation trades due to peer pressure, bear market rallies are better for trading, not holding," Hong says.

The Shanghai Composite Index gained 0.82 percent in the week end of March 25 amid positive results from domestic and international markets. Monetary authorities in the eurozone and in Japan maintained policies of negative interest rates to spur growth, while the US Fed said it would keep rates unchanged despite healthy job figures, although there was talk grumbles of a rate hike.

Commodity prices also rebounded after the Organization of the Petroleum Exporting Countries began negotiations to cut production to stem the plunge in oil prices.

At home, China's central bank continued to guide interest rates lower through short- and midium-term lending facilities with commercial banks.

Property sector investments began to pick up in the first quarter despite a widening gap in housing prices between big and small cities. Government leaders in Beijing are faced with the daunting challenge of trying to cool an overheated property market in first-tier cities while addressing an excess in supply in smaller cities.

"The momentum from cyclical sectors will soon be overshadowed by concerns over stagflation. If price increases are not from rising demand due to a fundamental recovery, the sustainability of a rebound will be in doubt," Hong says.

lixiang@chinadaily.com.cn

(China Daily European Weekly 04/01/2016 page29)