Next leg of China's stock market rally will be more 'gradual,' strategist says

Strategy at BNP Paribas joining us with his take on things. Jason, lovely to have you in the show. Thank you very much for your time. How do you react? You know, first and foremost, I know you’re representing the equity markets, but Even so opening up bond trading for the secondary markets, is it a shot in the arm in terms of, you know, having off balance sheet funding requirements being met? Sure. I think this is part of the overall capital market reform. If you recall that I think for the past three to six months, the Chinese regulators have really spent a lot of time trying to improve the overall market operation. And then so I think part of that announcement just mentioned it’s a way for them to try to complete the reforms. So I think certainly a good step towards more allowing more investors to transact indeed and what does this mean to talk about the I’m sorry, go ahead, no, no, please, please complete your complete your point and then I’ll come in no problem. And the other you mentioned about this kind of two way transaction. I think our view is that this tool has been deployed a couple decades ago and so it’s very much a monetary tool in the near term, not necessarily the buy and hold type of strategy in a typical QE style that we have seen in other Western central banks. But does it make the market more attractive to investors who are wanting to take a bet in China purely on the basis of valuation? I would say from an equity standpoint, we have seen a pretty significant recovery on the valuation. Let’s take HSEI for example. As recently as end of January, we’re trading to standard deviation below its 10 year average and in the course of three months or so, we’ve now recovered to slightly above average. And so I would say a big part of that recovery has already happened. And going forward, while there is a potential positive catalyst in terms of the third Plenum coming up in July, we think that the next leg of the rally will perhaps be a little bit more gradual and investor will start to build up expectation heading into July. So there could be a little bit of profit ticking as we get into the second-half of the year. Jason, you’ve broached the topic that I very much want to talk about and you know I might just be a little bit of a cynic because you know as of last week we had 49 and 50 sessions in terms of the southbound positive we had. We had a lot of buying coming in from the domestic side and before the week of the 19th, before the 19th of April, we had pretty much two weeks of of a ramp up in that buying in terms of the the, the net inflow. Then the following week stateside we saw some big coarse breads being placed on the K web and the FXI and that clicked the CT as into gear, that clicked the algos into gear. We had this huge chase and you know the SKU, if you’re talking SPX versus Fxi, it went absolutely bananas. So from what you’re saying and what you’re suggesting is that we should expect this gradual increase versus any kind of you know, continuation of this. What about the counter argument here that none of this was based on fundamentals, none of this was based on any kind of assessment of the macro data earnings at all. That if we do see whether it be an OpEx event in the United States, whether it be you know, people thinking, OK, I’ve made my money now the hot money coming back out, what’s this say we’re not going to see a significant drawdown versus any kind of incremental gains. What are you seeing that would make you believe that we are going to see continuation of upside? I think that’s an excellent question in terms of the driver of this rally because I think at the beginning of that rally which started in mid-april, certainly the pace of it caught many people by surprise. I would say that the main difference this time around is that there seems to be a clear shift in the tone of the policy when it comes to the statement from the April Political Bureau statement. They acknowledge the fact that the economic growth is still weak despite a better than expected Q1 GDP. They also emphasize the policy support And also they mention structural reform in the Third Plenum, which lead us to believe that at least in the next two or three months leading up to the Plenum, I think there will be more coordinated policy support, at least in the near term, which may help prevent a significant drawdown.