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China Stocks Swing as Markets Reopen to Escalating U.S. Tensions

China’s Financial Markets Look Set for Another Post-Holiday Drop

(Bloomberg) --

Chinese financial markets reopened after an extended break with muted moves, despite the cautious shift in sentiment globally.

The mild reaction was taken by analysts as a sign of confidence over China’s efforts to maintain market stability and its ability to recover from the economic impact of the pandemic. The CSI 300 Index of stocks closed 0.6% higher after falling as much as 1.2%, as it traded for the first time since Thursday. The yuan weakened 0.4% to 7.091 per U.S. dollar while its offshore counterpart strengthened 0.25%.

“Today’s open suggests onshore traders are pricing in higher confidence over China’s economic recovery,” said Dai Ming, fund manager at Hengsheng Asset Management Co. in Shanghai.

Wednesday represented the first chance for mainland investors since April 30 to react to concern over escalating political tensions with the U.S., which threaten to undermine a trade deal signed only months ago. One key signal for the currency came with the central bank’s daily fixing Wednesday, which was slightly stronger than expected. That suggests China may want to limit volatility.

“Market sentiment isn’t very badly affected by the verbal fight between China and the U.S.,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The hope remains that China will commit to the trade deal. Also, it’s widely known that for Chinese officials, market stability is very important.”

China’s market reopen was nothing like February’s, when stocks fell as much as 9.1% and the yuan tumbled the most in six months. A long list of targeted support measures since have eased concern over cratering domestic demand, and markets have stabilized. For stocks, investors are now putting a price on the bleak economic outlook globally that could hamper a recovery for corporate earnings after the worst start to a year since 2003.

China Stocks Swing as Markets Reopen to Escalating U.S. Tensions

“I don’t expect to see a strong rally in A shares and the market is likely to stay range-bound,” said Ma Cheng, chairman at Shenzhen Juze Investment Management Co., adding that the main opportunities remained in specific sectors rather than the overall market.

Technology and telecom shares were the top performers on Wednesday, with Gigadevice Semiconductor (Beijing) Inc. gaining by the 10% daily limit and Shenzhen Sunway Communication Co. climbing 4.9%. A gauge of financial companies fell, led by property developers.

After a steady but underwhelming month for Chinese assets, investors are counting on more stimulus from Beijing as the catalyst that will recharge the country’s financial markets. In April, the Shanghai Composite Index lagged the MSCI Inc. index of global stocks by the most in almost two years. The yuan eked out a small gain, while the yield on 10-year sovereign debt held near an 18-year low.

Currency traders aren’t expecting the yuan to go wild: at just below 6%, the offshore rate’s one-month implied volatility is below this year’s peak of nearly 10%. Its 12-month forward points, an indicator for investors’ bearishness, are near their 50-day moving average.

For China’s fixed-income market, the question is whether the looming wall of supply could derail this year’s rally in sovereign debt. Local governments are expected to sell some 1 trillion yuan ($141 billion) of bonds in May, the most on record. Commercial banks, which hold a large chunk of China’s sovereign debt, may switch into higher-yielding local government bonds.

The top focus for China investors going into the holiday was May 22, the start of the key annual meetings of the country’s top legislature. But renewed concern over trade -- at a time when overseas demand is already so weak -- could overshadow any measures China announces to help boost growth at home.

©2020 Bloomberg L.P.