China Stocks’ Strong Start to New Year Falters Near Record High

China’s stock benchmark declined after briefly surpassing its 2007 closing peak, as mainland financial markets opened for the first time following the Lunar New Year break.

The CSI 300 Index fell 0.7% to close at 5,768.38 points, within 1.9% from an all-time record high. The ChiNext gauge of small caps, which is more sensitive to liquidity conditions, slipped 2.7% after the central bank withdrew short-term funding from the banking system. The yuan was steady.

The CSI 300 is up 11% this year, with a valuation metric at the highest in nearly six years. While traders remain bullish about the equity market’s long-term prospects, evidence of overcrowding in stocks like liquor makers has made some investors more prudent. Thursday’s moves offered a contrast to 2020, when Chinese markets plunged by the most value on record after an extended Lunar New Year break.

“It’s unsurprising to see some hesitation at this point with the institutional-loved stocks and those with high earnings visibility at these levels,” said Yang Zhiyong, a fund manager at Beijing Gemchart Asset Management Co. “The moves today match the trend globally in the past few days, which has been a surge in cyclicals like materials and energy while tech shares or those that are heavily held by institutional investors were weak.”

China Stocks’ Strong Start to New Year Falters Near Record High

Traders had bid the CSI 300 Index up to 13-year highs in January, but momentum cooled as investors shifted a record level of money into Hong Kong stocks as domestic prices surged. The city’s Hang Seng Index was down 1.3% as of 3:06 p.m. in line with regional moves, even as mainland buyers bought nearly $1.7 billion of stocks in Hong Kong.

How China’s central bank balances support for an uneven economic recovery without fueling excessive speculation is a key driver of investor sentiment. Traders were rattled by January’s liquidity squeeze when the PBOC withdrew cash from the financial system for the first time in six months, but authorities have drip-fed funding since then.

China provided medium-term funds to lenders on Thursday. The People’s Bank of China offered 200 billion yuan ($31 billion) of one-year liquidity with its medium-term lending facility, according to a statement. That helped offset the loans that mature this month. It kept the interest rate on the funds unchanged at 2.95%.

While there are signs China’s economic recovery from the pandemic remains unbalanced, it is outpacing the rest of the world, having roared back to pre-pandemic growth rates in the fourth quarter.

“We’re all talking about the global pandemic recovery but the speed of recovery in China has been faster than any other country,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. “While there are still sufficient funds in the market, more foreign investors will continue eyeing Chinese markets.”

©2021 Bloomberg L.P.

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