China’s US$11 trillion stock market is staging a quiet resurgence

[BEIJING] Chinese stocks have gained ground in recent months despite a lack of major catalysts, with ample domestic liquidity likely to sustain the rally.

Mainland households, flushed with record-high savings, are turning to equities for better returns as interest rates continue to drift lower. This shift in behaviour has led to a surge in margin loans taken out to buy stocks, which climbed to the highest level since 2015 this week. The momentum is also seen in the monthly average turnover on onshore exchanges, which is on track for a third month of advances.

That’s pushed up the benchmark CSI 300 Index 15 per cent from its April low, following months of range-bound trading. While Beijing has not announced any major stimulus or finalised a trade deal with the US, markets have reacted positively to recent moves to curb excessive price wars and overcapacity in some sectors. These steps are seen by investors as a way to ease deflation and boost corporate earnings, which could provide further support to the market gains.

“Funds with a high risk appetite are gradually increasing their allocations to stocks, against the backdrop of low interest rates, a lack of good investment options and a surplus of liquidity,” said Fu Zhifeng, chief investment officer at Shanghai Chengzhou Investment Management. “The trend has just started building momentum, and I don’t see any signals for it to reverse anytime soon.”

A gauge of onshore-listed small-cap stocks, long favoured by individual investors, has surged to an eight-year high. The measure’s 14-day relative strength index has remained above the overbought level of 70 for six straight sessions.

Cinda Securities expects retail flows to accelerate in the second half of the year amid optimism over the government’s five-year development plan. That may be supported by higher money growth locally. Liquidity supply in China rose 4.6 per cent in June from a year ago, the largest rise in more than two years, the latest data showed.

Ample liquidity could offset any potential outflows as some investors take profit after the recent rally.

“There’s little room for a major correction,” said Zhou Nan, founder and investment director of Shenzhen Long Hui Fund Management. He expects some selling pressure as the Shanghai Composite Index approaches 3,700, a nearly four-year high.

The gauge is about 0.2 per cent away from the intraday high reached on Oct 8 following a central bank policy blitz, a resistance level closely watched by local investors.

Still, sceptics argue that the rally is unlikely to sustain without a meaningful recovery in earnings and economic prospects. The “divergent performance among sectors suggests there is no systematic improvement in the market yet”, said Shen Meng, director at Beijing-based investment bank Chanson & Co.

That said, improving trade ties with the US is spurring some risk-on sentiment. Strategists at Citigroup and Goldman Sachs have raised views on the country’s stocks. Meanwhile, local insurance funds offer further support for equities.

“This round of market rally, fuelled by investor optimism, is far from over,” given that residents’ willingness to invest in stocks has increased, China International Capital Corporation analysts, including Li Qiusuo wrote in a Monday note. BLOOMBERG