China Bulls Look for Redemption as Beijing Shows Policy Resolve

A rally in Chinese stocks is gathering steam on early signs that authorities are acting on the policy pledges made at the Politburo meeting, raising hopes that bulls may finally be having their moment.

(Bloomberg) — A rally in Chinese stocks is gathering steam on early signs that authorities are acting on the policy pledges made at the Politburo meeting, raising hopes that bulls may finally be having their moment.

Equities in Hong Kong and on the mainland jumped on Friday, capping their best week in months, after a report indicated that regulators are ready to grant the nation’s largest technology firms broader leeway in backing startup investments.

Separately, Bloomberg News reported that China’s markets watchdog has consulted securities firms for possible measures to boost stocks, with a cut in the stamp duty and a slowdown in initial public offerings to help liquidity among the steps proposed by brokers. 

Investors are giving authorities the benefit of doubt that promises to spur growth and revitalize the private sector will be followed by actions. The turn in sentiment has made the Hang Seng China Enterprises Index, which tracks major Chinese firms listed in Hong Kong, one of the top performers this week in a list of 92 global equity indexes tracked by Bloomberg. It also offers a shot at redemption to China stock bulls like BlackRock Inc. and Fidelity International, who held their calls heading into the second half of 2023 despite repeated disappointments on the policy front.

“The speculation about cutting stamp duty has helped lift market sentiment today, as the move would be following the vows to boost financial markets mentioned during the politburo meeting”, said Steven Leung, executive director at UOB-Kay Hian Hong Kong.   

The CSI 300 Index of onshore Chinese stocks rallied 2.3% on Friday, capping its biggest weekly advance since the start of November — when an abrupt exit from Covid Zero drove a buying frenzy. Its financials sub-index rallied more than 4%. The Hang Seng China gauge closed up 2.1% on Friday.

Gains have been more pronounced among sectors that saw the heaviest losses in the past months — tech and property. The Hang Seng Tech Index, whose members include Internet behemoths Tencent Holdings Ltd. and Alibaba Group Holding Ltd., entered a bull market with its advance from a May low topping 20%.

“News of regulators looking into tech startups and investments may be another sign of fading regulatory headwinds and could revive deal-making in the tech sector,” said Marvin Chen, an analyst at Bloomberg Intelligence in Hong Kong. That “looks to be boosting sentiment,” he said.

Read: Goldman Says Hedge Funds Bought China Stocks on Aid Pledge

Investors have stressed that follow-through and implementation of policy promises is a must to sustain the nascent rebound in Chinese equities. For now, Beijing seems to be doing just enough to keep the rally going. 

Efforts to stabilize the property sector are also luring investors back into the market, pushing a gauge of developer stocks closer to a technical bull territory. China will maintain stable financing channels in capital markets for real estate developers, the country’s Securities Regulatory Commission said in a statement after a meeting on Monday and Tuesday. 

That said, the jury is out on whether the stock gains will continue, and the following weeks will be crucial in determining the market’s trend. With investors burned repeatedly from policy promises that lacked implementation, another round of disappointment will further raise doubts about the market’s investability.

US-based hedge funds are selling into the rally in Chinese stocks, according to Morgan Stanley. The fast-money managers have unloaded roughly $700 million in New York-listed shares of Chinese companies this month, strategists led by Gilbert Wong wrote in a Thursday report, citing the bank’s analysis.

Further, health of China’s economy remains a concern. High frequency indicators show the recovery continued to lose momentum in July, with consumers pulling back on spending and the property market showing no signs of a rebound. 

‘Very Attractive’

Still, cheaper valuations and the risk of missing out on any potential sharp rebound has been one reason cited by bullish investors. The CSI 300 is trading at 11.4 times its one-year forward earnings, versus a three-year average multiple of 13.2.

Credit Suisse Group AG turned overweight on Chinese equities in July, adding to similar existing calls from a host of the world’s largest fund houses and brokerages including BlackRock and Fidelity International.

Foreign investors have piled into mainland shares this week. They net purchased 16 billion yuan ($2.3 billion) of stocks on Friday, taking inflows over the five-day period to the largest since January. Volumes for call options on the HSCEI Index were almost 50% higher than for put contracts on average over the past five days, according to data compiled by Bloomberg. The most actively traded call contract was a 7,400 strike with August expiry, which implies an upside of almost 9% from current levels. 

“Some portfolio managers we spoke with found Chinese stocks’ valuations very attractive,” said Claire Liang, senior manager research analyst with Morningstar Asia Ltd. “Given the already low market expectations, some believed it won’t take a lot for the market to rebound.”  

–With assistance from Charlotte Yang and April Ma.

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