New stocks in Shanghai may crimp liquidity for CAF and other big China ETFs

Analysts are looking for momentum in Shanghai to falter over concerns of tightening liquidity amid China’s still-rigid monetary policies and the removal of trading restrictions on a larger number of shares that are currently not tradable.

Last week the Shanghai Composite Index rose 1%, its fourth consecutive weekly gain in a row. However, few expect that track record of positive performance to remain unbroken for long.

“Sentiment has improved in recent weeks but neither the economic data nor market liquidity condition support  continued market growth,” said Qian Qimin, an analyst at Shenyin & Wanguo Securities Co.

Part of the problem is that nearly 16.09 billion yuan ($2.5 billion) in shares from 22 companies will be coming to market for the first time this week on the Shanghai and Shenzhen exchanges after the expiry of lockup periods.

And with all that extra supply of equity on the menu, Beijing is likely to stay stingy with its monetary policy as long as inflation remains elevated.

China’s consumer price index rose 4.5% in January according to the China’s National Bureau of Statistics, well above market expectations and official targets closer to 4%.

With a print like that on the tape, few expect the supply of yuan to expand to meet the supply of equity to buy. Fewer yuan chasing more stock is a classic recipe for a liquidity squeeze, so be careful out there.

Trader looking to gain exposure to the Shanghai and Shenzhen Stock Exchanges can look into the Morgan Stanley China A Share Fund (CAF, quote).

CAF’s investment objective is to seek capital growth. The fund invests at least 80% of its assets in A-shares of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges and may also invest a portion of its assets in structured notes and other types of structured investments.

Heavily weighted sectors include auto components, beverages, chemicals, commercial banks, construction materials, insurance, machinery and metals and mining.



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