Market Analysis

China's markets roar back to life following a week-long vacation

Amos Simanungkalit · 08 Oct5.5K Views

Chinese stocks surged to two-year highs on Tuesday, continuing a powerful rally as markets reopened after a week-long holiday, fueled by investor optimism over stimulus measures to boost the economy.

The blue-chip CSI300 index jumped 10% in early trading, reaching its highest level since mid-2022, while the Shanghai Composite climbed 9.7%, marking its best performance since December 2021.

Conversely, Hong Kong's Hang Seng Index, which had hit 2.5-year highs on Monday, fell by 2.8%. The yuan weakened significantly, trading at 7.0502 per dollar, and five-year bond futures dropped to their lowest point since July.

Investors are awaiting further details on the stimulus from a press conference by the National Development and Reform Commission, scheduled for 0200 GMT, which could provide more insight into the policies driving the market surge.

Prior to the holiday break, China had unveiled its most aggressive stimulus package since the pandemic, leading to a 25% gain in the CSI300 index over five sessions. The surge in market activity pushed brokers and trading systems to their limits, with both the CSI300 and Shanghai Composite registering their largest gains since 2008 on the preceding Monday.

In efforts to stabilize the economy, which has been showing signs of slowing, authorities have implemented interest rate cuts and hinted at potential fiscal support.

Hedge fund manager David Tepper expressed optimism about China's economic prospects before the Golden Week holiday, stating on CNBC that the measures were promising enough for him to "buy everything" in China.

However, some analysts are now advising caution. Bank of America noted that China's weighting in the MSCI Emerging Markets Index rose from 24% in August to 30%, and the country’s continued outperformance could drive a self-reinforcing "pain trade" before the end of the year.

They added that the "buy everything" phase may be nearing its end, with future market momentum influenced by factors such as fiscal support, earnings, the U.S. election, and additional policy changes. The bank's analysts suggested that consumer, property, and broker stocks could be potential candidates for profit-taking, while large-cap internet companies and high-yield state-owned enterprises (SOEs) remain their preferred investments.