HSBC Downgrades China Stocks, Shanghai Index Down 5% on Week

HSBC is not so optimistic about the recent rally in China's financial markets.

Author: Belinda Zhou   

British banking giant HSBC Holdings PLC has downgraded its outlook on stocks in China from "overweight" to "neutral."

The largest bank in Europe has demoted China recently even as the rally drove the Chinese stock market to outperform the rest of Asia. The FTSE China Index has risen 8% this year ending Thursday, compared with a drop of 1.2% in FTSE Asia ex Japan during the same period, according to HSBC.

"It is expensive on an absolute basis," Herald van der Linde, the head of Asia Pacific equity strategy at HSBC, told CNBC on Thursday.

The Shanghai Composite opened at 3,379 on Monday and closed at 3,214 on Friday, down 5% this week.

Earlier, the Shanghai Stock Exchange has risen nearly 7%. Chinese benchmarks caught fire on July 6 as the Shanghai Composite recorded its best single-day percentage gain since July 2015. 

The Shanghai Composite was entering the bull market after a low in late March with stock prices up 20% usually after a drop of 20% and before a second 20% decline.

China's economy grew 3.2% year-over-year in the second quarter, official data showed on Thursday. The Asian strategy head said it's encouraging for corporate earnings and added that over the next two to three weeks the retail numbers will show whether the consumer spending will hinder China's recovery. 

Additionally, Linde said the bank was "not really comfortable" with the retail investor's margin trading, which pushed the stock price higher and not in line with the fundamentals.

Different from the institution-dominated U.S. stock market, retail investors are still the mainstream of A-shares holders.

As of the end of November, the number of individual investors who have opened A-share accounts reached a record high of 158 million after a benchmark of 100 million in 2016, as data from Shujubao showed.

The number of institutional investors in mainland China continued to grow in 2019 after falling back in 2018, with a cumulative increase of 24,500.

For risk tolerance, nearly half of Chinese investors tend to be aggressive, with growth and aggressiveness preference for 53.23% of the total. The number of investors with stable preferences is the smallest, accounting for less than 13%.

As to gender distribution, since 2007, the proportion of Chinese female stock traders has decreased year by year. A-share investors are still largely men - they make up about 75%.