Why further rally in Chinese stocks is unlikely
Fresh liquidity and positive economic data sparked recent gains, but capital flows suggest interest in equities remains sluggish
In early July, long-depressed Chinese stocks stepped into the unlikely role of stars among emerging markets. But the outperformance has ended, and it’s very unlikely investors will see a repeat any time soon.
At the rebound’s peak in early September, the MSCI China index of mostly offshore listings in Hong Kong had risen 20 per cent from June lows, while the onshore market spiked 16 per cent.
Helping fuel that rally was a spate of reassuring data that considerably improved views of the Chinese economy. Also, China, with its closed capital system, was seen as a relatively safe haven among emerging economies, whose growth is threatened by more capital outflows when the US Federal Reserve cuts its asset-buying programme.
But the recent rally reflected mainly a reduction in extreme bearishness on the Chinese market, and hence an improvement in share valuations, rather than a foundation for sustained share-price gains.
“It’s not the beginning of a trend reversal,” said Joseph Tang, who as Invesco Asia’s investment director helps manage US$1.3 billion in a series of China-focused funds. “It’s too early to say if China equities have entered a long-term up trend.”
Ahead of a one-week closure of mainland markets for National Day that starts on Tuesday, China shares trimmed gains, and some with large recent gains have been hit by profit-taking. Still, the MSCI China index has risen more than 10 per cent in the third quarter.