China imposes taxes

Chinese equities continued to post strong gains in May - the Shanghai A-share Index broke past the 4,000 point level for the first time, with a record US$50bn-worth of stocks traded.

In a bid to cool the stock market, the government raised taxes on securities transactions. Separately, it eased restrictions on offshore equity-related investments under the Qualified Domestic Institutional Investor scheme. As a result, the Hong Kong market, which is expected to be the main beneficiary of the move, made its strongest one-day advance in close to a year.

Fears of overheating also prompted the central bank to raise its key deposit and lending rates, hike the reserve requirement ratio for banks by a further 0.5%, and widen the trading band for the renminbi to 0.5%, from 0.3%.

Hong Kong's economic growth accelerated to 5.6% year-on-year in the first quarter, buoyed by robust consumer spending.

China's government imposed taxes on a range of goods, such as lower-end iron and steel products, ahead of trade talks with the US. Although no headway was made on the currency issue, China made several concessions, including more US flights to the mainland and greater access to its financial markets.

Cooling the stock market

Domestic equities reached record highs over the month, driven by increased retail participation, with close to 24 million new share trading accounts opened since the start of the year. With verbal warnings having little effect on quelling investor euphoria, the government tripled the stamp duty on share transactions at the end of the month, in the hopes of defusing the asset price bubble. Although markets fell after the announcement, share prices rebounded by the following day.

At the time of writing, trading in A-shares remains volatile. Meanwhile, it is uncertain as to how long the dampening effect on sentiment will last. Real deposit rates are close to zero, and while the government has made it easier for domestic investors to invest overseas, most appear unwilling to explore that opportunity, given the higher returns enjoyed within the mainland markets.

As such, we see little reason to change our current investment strategy, and prefer instead to gain exposure to China via shares listed on the Hong Kong stock exchange, where we continue to find stocks that meet our quality criteria and yet, trade at cheaper valuations.

Upbeat corporate newsflow

Petrochina reported the discovery of a large oilfield with geological reserves of 1,020m tonnes of oil equivalent. Elsewhere, Dah Sing Banking Group completed its acquisition of a 17% stake in Chongqing Commercial Bank, while China Merchants Bank's move to buy 33.4% of an affiliated fund management venture was approved. Meanwhile, China Mobile added a record 5.28m new subscribers in April.

Buoyant corporate earnings

First-quarter reports were generally positive: shares of ASM Pacific rallied, despite posting a 32% year-on-year fall in profits, as it issued cautiously optimistic guidance; and Convenience Retail Asia reported higher net profits, boosted by the robust growth of its convenience store business, as well as the inclusion of the newly-acquired Saint Honore's earnings. In its first-quarter operations update, CLP Holdings said revenue rose 8.1% from a year ago, on the back of broad-based growth. Meanwhile, Aeon Credit's full-year earnings rose 5.8%, as steady credit card sales transactions and continued improvements in asset quality helped to offset higher costs.

Aberdeen Asset Management Asia Ltd