Market's rebound to be put to the test
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The recent gains in the Chinese stock market will be put to the test this week as investors remain cautious ahead of the official release of the second quarter's macroeconomic data and Agricultural Bank of China's heavyweight initial public offering (IPO).
Signs of a potential rebound have emerged in the A-share market as the benchmark Shanghai Composite Index gained 2.3 percent last Friday, lending support to the central bank's statement that it would continue the relatively loose monetary policy.
"The recent rally was boosted by improved liquidity in the market and the buying sentiment was kindled by the central bank's pledge to maintain a loose monetary policy," said Qian Qimin, an analyst at Shenyin and Wanguo Securities. "But it is unclear that the market liquidity will remain strong after the float of ABC's massive IPO."
Qian said the market was likely to face strong resistance at the psychologically important level of 2500 points and it might return to the sluggish trend after ABC's heavy load of shares are publicly traded.
The Shanghai index gained 4.7 percent last week as market sentiment improved on expectations of strong first-half corporate earnings after some domestic companies issued positive profit guidance. It is also widely expected that the central government may ease its domestic tightening in the second half of the year on concern of a slowing economic growth.
Market watchers feel that an imminent shift in the downward trend is likely to emerge as technical indicators signaled that the recent rally may continue. The CSI 300's daily Moving Average Convergence/Divergence indicator and relative strength index are "showing positive divergence signs since May, signaling an imminent change in the downtrend", analysts Nigel Foo and Kong Seh Siang at CIMB Group Holdings Bhd wrote in a recent report.
Some analysts doubted the sustainability of the recent rally and said the market would remain range-bound amid the uncertainties over the potential effect of the ongoing structural adjustment of China's economy, "In a nutshell, we are back to the 2000 to 2002 period during which the China market struggled under a structural adjustment of the economy. We will not have a meaningful bull market for China until we see more concrete results of this structural change," Vincent Chan, an analyst at Credit Suisse wrote. Chan noted that in the near term, a cyclical market rebound depended on two issues - the settlement of local government debt problems and more details of the public housing program.
