Among the various economic stimulus measures, tax cuts are widely seen to have the most direct and immediate effect in transforming the Chinese mainland stock market into a global champion from a perennial nag.
In the process, it has helped lift out of the doldrums the Hong Kong bourse on which the H shares of nearly all major mainland enterprises are listed.
The rush to buy mainland stocks in past weeks was fanned by investors’ belief that the substantial tax cuts can help boost corporate earnings at a time when the business environment is clouded by a slowdown in economic growth and the nagging trade dispute with the United States.
Investors also expect that many enterprises will use the savings from tax cuts to buy back their shares to boost prices. Indeed, the US stock market rally is widely attributed to the waves after waves of corporate buybacks following the tax cuts last year.
Although buybacks are not popular on the mainland with a rather different corporate culture, the tax savings can still help them reduce debts. The resulting savings in debt servicing cost would make a big difference to the bottom line.
Investors’ confidence is further raised by expectations of increased fixed asset expenditure and injections of fresh capital into the system through further reductions in bank reserve requirement, a version of quantitative easing.
Many stock analysts in Hong Kong, including those at large international banks, have changed their tone to recommending mainland stocks with enthusiasm not seen in recent years.
To be sure, the clouds of the trade dispute and slowing economic growth continue to cast a shadow on the market. But mainland stocks are now widely seen to be bargains ready to be picked.
Hong Kong investors who want to hunt for the bargains would need to, well, think outside the box and just follow the so-called “themes” set by their mainland counterparts.
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