Following three successive days of losses, China's markets rebounded on Friday, managing to avoid losses for the week. Gains continued into Monday, with the benchmark posting its largest increase over a month. In both cases, the upward movement was fueled by speculation or concrete action on steps to be taken by the government to prop up markets and boost the economy.
Continuing efforts by the government to improve the situation means that the situation may not be as gloomy as it appears. In addition, conventional metrics may not be taking into account the inherent growth potential of China's companies. This means that it may still be a good option to add certain China stocks to your portfolio.
Steady Trade, Boom and Plunge
Approximately a year back, the Shanghai Composite index was holding steady around the 2,000 mark. This was similar to levels experienced since 2012. However, changes in official policy and additional liquidity sparked off a phenomenal bull run which ended this June. At that point, the index had hit 5,100.
The benchmark index declined 15% in July, marking its worst monthly losses since Aug 2009. The Shanghai Composite is now trading around the 3,600 mark. The majority of market watchers believe that it will be some time before it can once again make significant gains. Margin traders retreated from the market and the number of fresh equity accounts opened nosedived.
Sustained Government Efforts
A number of government measures taken to prop up markets resulted in a rebound of 12% from the low the benchmark had hit in July. China's government has taken a series of steps. Measures included suspension of trading for 1,400 and more companies, preventing shareholders from offloading stakes, delaying IPOs and providing a government agency with access to funds in excess of $480 billion to fund purchase of equities.
On the economic front, reforms of government owned enterprises have been accelerated. Authorities have also eased regulations on the purchase of real estate. This is an attempt to prop up a sector which was substantially responsible for the country's spectacular growth record but is now undergoing a slump.
