(Bloomberg) -- Chinese stocks got a much-needed shot in the arm Tuesday, gaining the most in two months amid signs the government is willing to ease its tightening campaign to avoid an overly sharp economic slowdown.
The rally followed a meeting where policy makers mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging. Government bonds, which had been advancing at the fastest pace since 2008, declined.
That was a change for China’s equity investors. Only days ago, a $1 trillion rout had left banks and other onshore giants flirting with a bear market, while foreign-listed tech was having its worst start to a year since 2013, and previously profitable Wall Street strategies tracking the cheapest stocks or biggest dividend payers had all but unraveled. Even small caps, which enjoyed a brief moment in the sun in March, had resumed a multiyear rout.
“The Politburo meeting sends a signal that China may roll out fiscal stimulus and supportive monetary policies to resolve financial risk and stabilize markets,” said Ken Chen, a Shanghai-based analyst with KGI Securities Co. “That has boosted sentiment on the market, especially for blue chips.”
Bulls returned in full force Tuesday, at one point sending the FTSE China A50 Index toward its biggest daily gain since 2016. All industry groups on the broader CSI 300 Index rose, with property developers and banks leading the advance. Even tech rebounded from a two-day slump. Firms tied to materials advanced as strength in cement companies outweighed declines for aluminum makers. The ChiNext gauge of small caps jumped 3.1 percent, its best day this month.
While the rally helped patch some of the damage inflicted on Chinese stocks this year, the country’s benchmarks are still among the world’s worst performers since their January peaks. For Bocom International Holdings Co.’s Hao Hong, onshore equities are going through a volatile period, with valuations, a slowing economy and limited inflation pressure tipping the balance in favor of bonds.
“The general trend for the stock market is down,” he said. “If you were buying Chinese banks for their dividend yield, then you might as well buy Chinese government bonds.”
The gap between dividend yields and bond yields has been watched by investors after the Shanghai Composite Index’s best start to a year in a decade made stocks pricey relative to government debt. That spread widened again Tuesday.
Hints from the Politburo meeting suggest policy makers are well aware of what’s been causing market jitters. A trade spat with the U.S. has added another layer of uncertainty to an economy already grappling with the effects of the government’s goal to curb leverage and reduce risk in the financial sector.
The shift in tone is “a sign that China is paying attention to the downward pressure in the economy,” Han Wang, chief macro analyst at Industrial Securities Co., wrote in a note Tuesday. “This would cushion part of investors’ worries about the economy due to trade concern and would boost the risk appetite of the market.”
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