Some of China’s biggest brokerages are calling for an easing of policy, awakening the stock market from a three-month slumber. Foreign funds responded with a record amount of purchases, after staying clear of the risk of policy tightening since the start of the year.
Net buying of Chinese onshore stocks amounted to 21.7 billion yuan (US$3.4 billion) through the Connect scheme with Hong Kong on Tuesday, according to exchange data. That is the biggest rush since the cross-border channel was introduced in 2014.
Offshore funds bought another 9.1 billion yuan of Chinese stocks on Wednesday, bringing the tally so far this year to almost 190 billion yuan, according to Bloomberg data. The Shanghai Composite rose 0.3 per cent to 3,593.36 at the close on Wednesday, adding to a 2.4 per cent jump on Tuesday to the highest level in three months.
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“Investors should be looking for opportunities to jump onto the boat,” said Zeng Wanping, an analyst at China Galaxy Securities. “There’s no systemic risk currently, but it still remains to be seen if this will turn into a raging bull market.”
The inflows helped the Shanghai Composite Index break out of the tight sideways trading pattern it had been stuck in since March. The rally may be forming the base for an uptrend that Guotai Junan Securities predicted will pave the way to 4,000 points, a level not seen since the market meltdown of 2015.
Explanations for the sudden breakout in the benchmark index range from a crackdown on surging commodity prices and cryptocurrencies, to a strengthening local currency and the outlook for policy easing, analysts said.
Cooling raw material prices will deflate the risk from inflation, while a stronger yuan will attract foreign funds hunting for higher yields in local markets. Citic Securities, China’s biggest publicly traded brokerage, sees easing pressure on price increases in industrial products as policymakers talked down prices.
“We think market performance will be driven more by earnings growth, rather than a valuation re-rating,” said Bruce Pang, head of research and macro analysis at China Renaissance Securitiesin Hong Kong. “Market reforms and opening would be upside catalysts.”
Guotai Junan, in a report on May 23, cited the receding risk of inflation to back its call for a stock rally. Beijing has taken a variety of measures to talk down commodity prices. Prices of iron ore, steel and a host of raw materials reached records in recent weeks, fanned by a breakdown in supply chains and an ongoing global economic recovery.
China International Capital Corp, China’s top investment bank, speculated on Tuesday that the government could loosen its fiscal tightening over the next two months. The view was based on fiscal surplus in the first four months, and a potentially smaller deficit than budgeted for the rest of 2021.
China’s onshore yuan strengthened by as much as 0.3 per cent to an intraday high of 6.3919 per dollar on Wednesday. The currency recently fetched 6.3969, the strongest level since June 2018. The central bank has indicated it was comfortable with the appreciation.
The rally and brisk trading produced several clear and early winners on Wednesday. Brokerage Industrial Securities soared by the 10 per cent limit, while CSC Financial rose 1.4 per cent.
Popular bets that have fuelled a run-up in Chinese stocks over the past year have regained favour among foreign investors. Kweichow Moutai and China Tourism Group Duty Free rose after topping the list of foreign buying on Tuesday.
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