Market Analysis

Chinese stocks surged to two-year highs on Tuesday, continuing their robust rally as mainland markets reopened following a week-long break, while Hong Kong shares faced significant declines as investors pulled back from the initial stimulus enthusiasm.

By mid-morning, mainland shares had gained $600 billion in market value, with trading volumes surpassing one trillion yuan ($142 billion) within just 20 minutes. Industrial metals soared on expectations that the recent influx of stimulus measures will stabilize a faltering economy, and stocks in the semiconductor and construction sectors saw significant gains as anticipated beneficiaries of government spending.

The blue-chip CSI300 index jumped 10% at the start and closed up 6% during morning trading. The Shanghai Composite also reached its highest level since December 2021, rising 5% overall.

In contrast, Hong Kong's market experienced heavy selling, with the Hang Seng index dropping 6.8% as investors took profits, particularly since some of the gains seen on the mainland were less substantial than traders had hoped for.

Despite this volatility, the bullish trend in China is still in its early phases. BOC International (BOCI) noted in a client update that now is an opportune time to establish long positions, particularly in tech stocks, building materials, and consumer sectors.

While new policy announcements could lead to corrections due to profit-taking, BOCI strategist Xu Peidong stated, "the market is likely to remain optimistic and continue its upward trajectory," as concerns over further economic slowdowns appear to have diminished.

The CSI all-share semiconductor index surged 16%, while the construction-engineering index rose 5.1%, and the consumer staples sub-index climbed 5.3% to reach a three-year high.

Conversely, the index tracking Hong Kong-listed mainland property developers plummeted 11%. If this decline persists, it would represent one of the largest percentage drops in recent history, although analysts suggested that technical factors may have driven the selling.

Natixis economist Gary Ng remarked, "There may be a bit of profit-taking, but the sentiment is largely unchanged. It's more about one market being closed for several days while the other has been active."

The Chinese yuan fell sharply to 7.0502 per dollar, and five-year bond futures dropped to their lowest levels since July before recovering during a press conference held by economic officials.

Growth Goals
During a highly anticipated press conference in Beijing, economic officials expressed strong confidence in meeting full-year economic targets and announced plans to release 200 billion yuan in advance budget spending and investment projects starting next year.

"Everyone is listening intently, hoping for clarity on the extent of fiscal stimulus," said Rong Ren Goh, a portfolio manager at Eastspring Investments. "Whether the stimulus is closer to 2 trillion or 10 trillion yuan is crucial," he added, noting that around 10 trillion yuan would be needed to sustain market momentum.

Prior to the Golden Week break, China unveiled its most aggressive stimulus measures since the pandemic, leading the CSI300 index to gain 25% over five sessions. Last Monday, both the CSI300 and Shanghai Composite recorded their largest increases since 2008.

However, some analysts are now advising caution due to the rapid gains. Bank of America analysts pointed out that China's weighting in the MSCI Emerging Markets Index rose from 24% in August to 30% currently, which could create a self-reinforcing “pain trade” before year-end.

Nevertheless, they cautioned that the "buy everything" phase may soon come to an end, with various factors, including market momentum, fiscal support, earnings, the upcoming U.S. elections, and future policy decisions influencing the outlook.

"Stocks in the consumer, property, and brokerage sectors could see profit-taking, while large-cap internet and high-yield state-owned enterprises remain our preferred investments," they advised.

Paraphrasing text from "Reuters" all rights reserved by the original author.