Friday’s surge in Chinese stocks rounds up a winning quarter for the country’s investors. China’s equities have outrun every other national market in the world in the three-month period. The CSI 300 Index’s 29 percent rally is its best since the end of 2014, when the nation’s equity bubble was forming. Apart from a Taiwanese chipmaker, a Brazilian steel producer and Latin America’s largest utility, all the top 30 performers on MSCI Inc.’s emerging-market benchmark are Chinese companies.
Managing a momentum-driven investor base, where turnover is in the hands of almost 150 million retail traders, has always been a challenge for the government. China’s experienced two massive bubbles in the past decade, with a tight-grip approach to tame the rally backfiring in 2015, drawing the ire of foreign investors. Analysts predict Beijing will be more successful this time in engineering a slow bull market.
“It’s a critical time for the market,” said Liao Zongkui, an analyst at Lianxun Securities Co. “Investors are keeping a close eye on earnings from heavyweight companies. A good results season will be a big confidence boost, and will ensure the stock-market rally can continue.”
Veteran subscribers will be accustomed to our long-time contention that monetary policy beats most other factors most of the time. That’s particularly true on Wall Street and is an even more important factor in the age of extraordinary monetary policy. In China, the state dictates the fate of the market so it is clear that bull markets are state sponsored.
The campaign to excise the shadow banking sector from the market is complete which removes a significant headwind for the market. The Party Congress, which concluded two weeks ago, clearly signaled the need for the banking sector to pick up its lending to private enterprise and that is a greenlight for speculative interest.
An additional factor that is positive for China is the potential positive conclusion of the trade talks. Trade has weighed most heavily on China’s markets and a removal of that headwind would be a clear positive.
The CSI 300 Index has been consolidating from the last couple of weeks and today’s upward dynamic suggests the range will be resolved on the upside to reassert medium-term demand dominance.
The H-Share Index in Hong Kong has been lagging but has catch-up potential.