Behind surging markets are solid fundamentals

In May, President Xi Jinping defined China’s new economic changes for the first time as the “new normal”. It means China will tolerate lower growth rates while accelerating reforms and economic restructuring. Premier Li Keqiang also repeatedly clarified that it does not matter if the real growth rate turns out to be moderately lower than pre-set targets.

The new stance brings hope to investors that the economy may gradually bottom out, although no one is sure where the bottom is.

In other words, the “new normal” stance has settled the markets and brought home to investors that the country’s reform and restructuring drive will unleash greater potentials of the world’s second-largest economy and lead to improved corporate performance and more sustainable growth of the broader economy in the future.

Some have readily attributed the stock market rally to the boosting effect of favorable policies, such as the interest rate cut last week, the first such move since 2012.

Such a cut, together with market expectations that more steps are in the pipeline, has provided a strong boost to the index. If the markets remain divided to the country’s fundamental policy stance, however, such a gain would be short-lived and could dive again if there are no new policy boosts in the coming months.

Now that policymakers have largely agreed that China will stick to its reform and restructuring policies and be more tolerant towards the “new normal” state, investors may take a long view and continue to buy. This scenario could possibly push the Shanghai index to the level of around 3,000 in the coming months, although temporary corrections cannot be ruled out.