Mainland stocks rally on hopes
Mainland stocks posted their largest gain in a year yesterday as investors bet the government will introduce market-boosting incentives.
But the rally could turn out to be short lived if the measures fall short of expectations or do not happen.
The Shanghai Composite Index climbed 71.48 points or 3.04 per cent to 2,420, the biggest daily percentage gain since October 15 last year.
Yet analysts described it as a strong technical rebound rather than a turnaround while predicting a correction in the near future.
The benchmark dropped after trading opened yesterday, falling 1.3 per cent to 2,318.63 points before gaining momentum.
'The index met strong technical support when it slumped to near 2,300 points,' said Shenyin Wanguo Securities analyst Wei Daoke. 'But it will also meet resistance at the 2,500-point level.'
The strong gain yesterday came amid speculation that Beijing would loosen monetary policies to buoy the economy and the equity market.
It was reported that Beijing would soon cut the reserve requirement ratio for banks, a move designed to ease the funding strain on lenders so that they could grant more loans to clients.
Speculation about more incentives followed news after the market close on Monday that Central Huijin Investment, an arm of the mainland's sovereign wealth fund, bought shares worth 200 million yuan (HK$244.6 million) in the Big Four banks on the secondary market, an apparent move to boost investor confidence.
The Shanghai index edged up only 0.16 per cent on Tuesday.
Brokerages led the rally yesterday amid a report from Xinhua that regulators had approved cross-border exchange-traded funds in Shanghai and Hong Kong, giving securities firms - such as Haitong Securities, which led a rally for brokerages - a new revenue source.
'It is unlikely that the economy will take a turn for the better and it has yet to reach its bottom,' Lombarda China Fund Management said in a report. 'Monetary easing won't take place until inflation pressure decreases.'
Beijing has been striving to control soaring consumer prices since last year to avoid a hard landing.
The Shanghai index is down 13.8 per cent so far this year following a 14.3 per cent decline last year.
On the mainland, financial authorities used to introduce incentives to bolster the market when the bears were out.
Huijin's further buying of banking shares yesterday was seen as part of Beijing's efforts to rescue the ailing market.
Mounting worries of a double-dip recession in the global economy and deteriorating corporate earnings continued to weigh on investors with analysts predicting the benchmark could fall to an intraday low of 1,664.93 points on October 28, 2008, 31 per cent off the current level.
The coming initial public offerings by Shaanxi Coal Industry and China Communications Construction are set to drain huge amounts of liquidity from existing stocks.