(Bloomberg) — A rally in Chinese stocks domestically after returning from a weeklong holiday cooled as traders questioned Beijing’s determination to add more stimulus. Shares in Hong Kong plummeted.
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The benchmark CSI 300 (000300.SS) Index was up 5.1% in afternoon trading, after rising nearly 11% in the opening minutes. Stocks fell in value after officials from China’s top economic planner – the National Development and Reform Commission – expressed caution at a news conference about unleashing more big stimulus measures.
A figure for Chinese shares listed in Hong Kong tumbled as much as 11% after rising by almost the same amount during the period when domestic markets were closed. The CSI 300 had risen for nine consecutive days through September 30 before Golden Week, boosted by a stimulus blitz that included interest rate cuts, freeing up cash for banks and support for stocks.
“The sustainability of this Chinese rally will depend on the action that follows words on the budget side of the equation,” said Aleksey Mironenko, global head of investment solutions at Leo Wealth in Hong Kong. “The most important thing we are looking at in the future – what policies will be announced in the coming weeks after the statements of the Politburo and the State Council? That will determine whether our overweight is a tactical one – which we will remove if relative valuations change – or a strategic one.”
Even before mainland markets reopened, skepticism grew about the rise in Chinese stocks. Many strategists and fund managers had viewed the recent rebound with caution, saying they were waiting for Beijing to back its stimulus promises with real money. Some had also become concerned that many stocks were already at overvalued levels.
An overheating A-share market and the implementation of the Chinese government’s recently announced policy stimulus are among the risks investors should keep an eye on amid the Chinese stock market rally, Morgan Stanley strategists including Laura Wang wrote in Hong Kong, in a research note.
Sales in Shanghai and Shenzhen rose to a record 2.6 trillion yuan ($368 billion) during Tuesday’s session. That surpassed the level of September 30, when the CSI 300 Index rose 8.5%, the biggest single-day gain since 2008.
Several brokers saw their trading apps temporarily freeze due to the surge in trading volumes, Cailian reported, citing an IT professional at a brokerage firm.
Expectations had risen as Chinese shares in Hong Kong rallied as domestic markets were closed. According to state broadcaster China Central Television, professionals in the information technology, operations and customer service departments at local brokerages have canceled their holidays to prepare for a busy trading session. Account openings at major brokers reached a record high during Golden Week, with overwhelming customer demand across both online and offline channels.
The Hang Seng China Enterprises (^HSCE) Index, which includes Chinese stocks traded in Hong Kong, tumbled as the focus shifted to domestic markets. Over the past month through Monday, the stock had risen more than 30%, making it the best performer among more than 90 global stock indexes tracked by Bloomberg.
“There is some convergence in the markets – a rotation from Hong Kong to China,” said Marvin Chen, a strategist at Bloomberg Intelligence in Hong Kong. “A shares will primarily benefit from the domestic liquidity boost.”
Bigger expenses
Officials at NDRC said they would accelerate spending, while largely reiterating plans to boost investment and increase direct support for low-income groups and recent graduates. They added that China would continue issuing ultra-long government bonds to support major projects next year and would bring forward a 100 billion yuan investment in key strategic areas originally budgeted for 2025 to this year.
China’s offshore yuan briefly turned to losses during the policy briefing as the stock rally lost steam before stabilizing. The domestic exchange rate, which had remained closed for five sessions, caught up, falling 0.6% to 7.066 per dollar. The interest rate on national government bonds initially rose by seven basis points, but then fell to 2.18%.
China’s leaders are targeting growth of around 5% this year, but economic data in recent months shows this will be difficult to achieve as consumer spending remains sluggish and the real estate crisis continues.
The world’s second-largest stock market has seen multiple boom-and-bust cycles. Faced with slowing growth and disinflation, China turned to stimulus in late 2014, kicking off an eye-popping stock market rally that came crashing back down to earth in spectacular fashion in mid-2015. The Shanghai Stock Exchange Composite Index more than doubled its level between October 2014 and June 2015, but then fell by more than 40% in two months.
“We need fiscal reforms, and then hopefully some really big economic reforms,” Eva Lee, head of Greater China Equities at UBS Global Wealth Management in Hong Kong, said on Bloomberg Television. “If we still haven’t taken major measures, we will probably end up at this level by the end of this year.”
—With help from Tian Chen, John Cheng, Sangmi Cha, and April Ma.
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