China Stocks, Currency Gain in Sign of Optimism for Local Assets
(Bloomberg) -- China’s stocks rallied to a six-year high and its currency strengthened, as a phone call between U.S. and Chinese leaders boosted the risk appetite of investors who expect bilateral ties to improve.
The Shanghai Composite Index closed 0.3% higher to finish at its highest level since August 2015. The onshore yuan also gained 0.2% to 6.4423 per dollar as of 3:10p.m. local time, set for the strongest since mid-June.
The rallies point to rising optimism about Chinese assets after Presidents Joe Biden and Xi Jinping had their first discussion since February on Thursday. The leaders talked about “the responsibility of both nations to ensure competition does not veer into conflict,” according to a White House statement.
For all the hand-wringing over China’s “common prosperity” campaign, the Shanghai gauge has been boosted by bets on monetary policy loosening measures to shore up economic growth that’s shown signs of a slowdown. Easing steps such as a cut in lenders’ reserve requirement ratio would unleash liquidity and typically trigger a positive response from cyclical stocks.
Mainland markets have been less affected by China’s months-long regulatory crackdown than those overseas, where the campaign’s main targets of tech giants and private tutoring firms are mostly listed. Foreign investors have added to their holdings of mainland shares every month since November via trading links with Hong Kong, with August’s purchases of $4.2 billion the highest in three months.
Advances in the Shanghai Composite on Friday were driven by the conglomerate sector, which includes the country’s largest banks such as Industrial & Commercial Bank of China. Property developer Metro Land Corp. jumped by the 10% daily limit for a sixth straight session to be one of the best performers in the gauge.
“The market is betting on some policy support to cope with the weak economy,” said Amy Lin, an analyst at Capital Securities Corp. Investors are snapping up property stocks given their “cheap valuation” while investment themes in the market have remained “unclear,” she added.
Friday’s uptick in the yuan could push the currency out of the narrow 1.3% band it has been wedged in since mid-June. The currency has remained resilient thanks to the authorities’ cautious approach in policy easing and capital inflows into onshore markets.
Foreign investors bought mainland stocks through the trading connections in 14 out of the past 15 sessions, with net purchase exceeding 3.6 billion yuan ($559 million) on Friday.
China’s other key stock index CSI 300, which tracks larger companies in the nation, ended 0.9% higher on Friday. It is still about 14% below its February peak. Hong Kong’s Hang Seng Tech Index, which tracks Chinese internet giants, snapped a two-day loss with a jump of as much as 2.9%, after a newspaper report clarified that Beijing was slowing down instead of halting new game approvals.
READ: China’s Large-Cap Stocks Can’t Stop Underperforming: Chart
The underperformance of Chinese big-cap stocks came after earnings of smaller-cap shares posted higher growth rates in the second quarter. Firms in the CSI 300 Index saw their net income rise 23% on average in the period, while their smaller peers in the CSI 500 Index reported a 44% increase, according to Guotai Junan Securities report in August.
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