China Gives Stock Bulls Surprise Gift Ahead of 70th Anniversary

(Bloomberg) -- China’s lifting of barriers for foreign investment in its stock and bond markets is a surprise gift for investors in the run up to the 70th birthday party of the People’s Republic.

While the move is seen by analysts as long on symbolism and short on impact, it’s likely to help sustain the rebound in domestic equities ahead of the crucial anniversary as well as stabilize the currency, which is trading near a decade-low. The announcement also follows Friday’s decision by the central bank to inject liquidity by lowering banks’ reserve ratios.

The Shanghai stock benchmark has climbed 9% in the past month, the best performer among global gauges. Rising turnover and increasing margin debt suggests investors are starting to flock back to equities after the trade war sparked a slump earlier in the year. Overseas investors pumped a net 28 billion yuan ($3.9 billion) into the nation’s shares via exchange links last week, the most since November.

“This is a positive signal,” said Leb Ren, a market analyst at CMC Markets in Shanghai. “China had said it’ll further open up its capital markets, and now it’s done this ahead of October, which will boost sentiment for the trade talks."

The Shanghai Composite added 0.2% Wednesday to trade its highest level in two months on a closing basis. The offshore yuan hovered near its highest level in two weeks. Tuesday’s announcement came after the close of regular mainland trading.

Here’s what analysts have to say:

Kinger Lau, chief China equity strategist at Goldman Sachs Group Inc.:

• This seems to be a significant enhancement of QFII reform
• Existing quotas are not binding constraints, so the near-term flow impact will still be driven more by fundamentals, events and inclusions

Gerry Alfonso, director of international business department at Shenwan Hongyuan Group Co.:

• The quota removals are a positive step as they allow international investors greater flexibility in planning their Chinese investments
• It’s China’s gesture to reduce red tape and reinforce the message that it’s continuing to open the capital market
• There’s unlikely to be any massive short-term impact on stocks

Steven Leung, strategist with UOB Kay Hian (Hong Kong) Ltd.:

• The move, together with the RRR cut and consumption policies, are part of a basket of measures for Beijing to stabilize the market before the Oct. 1 anniversary and to help the economy counter the negative trade war impact
• The quota removal sends a signal that the A-share market is open and investment is flexible

Paul Sandhu, head of multi-assets quant solutions and client advisory for Asia Pacific at BNP Asset Management Inc.:

• China is strategically making a positive push towards adding liquidity to the financial markets
• It is not clear how the overall market will react to these moves, but it is clear that over the short term, the dynamics of the yuan will function as a litmus test on whether the strategy is working

Chen Jiaxiang, managing director at Hang Zhou Yu Yan Investment:

• The scrapping of the quotas benefits foreign funds flowing into China
• The step paves the way to allow RQFII and QFII investors to invest in areas they didn’t have access to previously, such as commodities and private funds
• This could precede further accommodative policies for overseas investors

Ding Shuang, chief China and North Asia economist at Standard Chartered Bank Ltd.:

• The move is symbolic and won’t trigger significant capital inflows, as foreign investors have never used up the quotas and can buy yuan assets through other channels
• It’s a good gesture from China ahead of its 70th anniversary amid a lack of positive development on the trade front with the U.S.
• Overseas funds will likely keep buying onshore bonds as they get included in global indexes
• There’s little room for the yuan to slide further as fundamentals aren’t too bad and capital outflows are tightly controlled

Louis Tse, managing director at VC Asset Management Ltd.:

• It’s part of China’s measures to revamp their financial systems to welcome foreign investors
• There could be some foreign buying after the move, though onshore traders may take profit on the news
• The move is good for Chinese stocks in the medium-to-long term, but continuing Sino-U.S. trade tensions are likely to cap the shares’ upside in the near term

Yan Kaiwen, analyst with China Fortune Securities Co.:

• The removals send a strong signal that regulators want to introduce more funds into the domestic markets
• It will boost sentiment in the A-share market in the short term and encourage more foreign investments in China’s stock markets in the long run

--With assistance from Gregor Stuart Hunter.

To contact Bloomberg News staff for this story: Richard Frost in Hong Kong at rfrost4@bloomberg.net;Livia Yap in Hong Kong at lyap14@bloomberg.net;Amanda Wang in Shanghai at twang234@bloomberg.net;Jeanny Yu in Hong Kong at jyu107@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net;April Ma in Beijing at ama112@bloomberg.net;Ludi Wang in Shanghai at lwang191@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net

To contact the editors responsible for this story: Sarah Wells at smcdonald23@bloomberg.net, Sofia Horta e Costa, David Watkins

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