Investors hope for catch-up rally as Chinese stocks reopen

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A nearly 5 per cent rise for Hong Kong’s Hang Seng China Enterprises Index over the past week has stoked expectations for a catch-up rally when mainland stock exchanges return from their 10-day Lunar New Year holiday on Monday.

Traders and strategists say recent gains by Chinese equities have rekindled some clients’ interest in the market after years of underperformance, although some pointed out that activity on the city’s exchange had been thin during the past few days, and that foreign institutional investors had mostly remained on the sidelines.

“I’ve got some decent buying, but at the same time I’m selling into it,” said the Hong Kong-based trading head at one investment bank. “Monday will be much more of an acid test for the direction of the China market.”

The reopening of exchanges in Shanghai and Shenzhen in the new year of the dragon will serve as a high-profile litmus test of global investor demand for Chinese shares, which has been battered by slowing economic growth and ongoing woes in the country’s property sector.

China’s benchmark CSI 300 index, which had been down more than 9 per cent year to date in early February, posted a sharp rebound in the days just before the holiday, paring losses for the year to just 2 per cent by the close on February 8.

However, that still left the index down more than 40 per cent from a peak in early 2021, and last Wednesday, index provider MSCI announced plans to remove 66 constituents from its benchmark MSCI China index following protracted share price falls for the country’s largest listed companies.

Strategists said much of the pre-holiday gains for Chinese stocks had been driven by China’s so-called “national team” of state-run financial institutions, which are expected to resume share purchases on Beijing’s orders when markets reopen on Monday.

“In the near term, we think national team buying will continue to support the market,” said Si Fu, a China equity strategist at Goldman Sachs, who expected state buying to focus on exchange traded funds tracking the CSI 300 index and other mainland stock benchmarks.

She said that while clients from around the world had expressed more interest in Chinese shares recently, global investor expectations for the country’s stock market remained “really low” ahead of the “Two Meetings” next month in Beijing, at which top leaders will gather to set China’s national policy agenda for the coming year.

“What [investors] wish for is a more comprehensive easing package to really address the property and local government debt issues,” she said. “But that’s not what is expected.”

Analysts said that after multiple false starts over the past year, a sustained rally for Chinese shares would require policymakers to address the country’s property market crisis, as well as the looming debt pile faced by local governments.

“We may have already passed the point where they can use one big announcement to reverse market sentiment,” said Liu Minyue, investment specialist for Asian and global emerging markets equities at BNP Paribas Asset Management.

“They have to show continued support and implement more policies that have been announced on the property and local government debt side,” Liu added. “The Chinese market is definitely not out of the woods yet.”

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