Defence shares drive China stocks to 3-month high as tensions heat up over landmark South China Sea ruling

Shanghai stocks jumped to a three-month high on Tuesday, boosted by a surge in the defence sector as investors rushed to buy aerospace and shipbuilding stocks ahead of a court ruling over the South China Sea dispute between China and the Philippines that was expected to escalate military tensions.

The Shanghai Composite Index ended up 1.8 per cent or 54.46 points at 3,049.38, the best level it has seen since mid-April. The large-cap CSI300 advanced 2.2 per cent or 69.85 points to 3,273.18.

Hong Kong’s Hang Seng Index also closed at its highest level in a month, up 1.7 per cent or 344.24 points to 21,224.74.

In Shenzhen, the Shenzhen Composite Index closed up 1.2 per cent or 24.04 points to 2,025.02 while the startup board ChiNext Index finished 1.3 per cent or 28.77 points higher at 2,247.35.

Shortly after the market close, an international tribunal in The Hague ruled that China’s claims to sovereignty over much of the South China Sea had no legal basis.

Analysts said investors had been worried about the potential for a military confrontation and that sentiment was driving defence-related stocks higher on Tuesday.

“Beijing is standing firm on its sovereign rights and there are worries over potential military action,” said Joseph Tong, chairman of Morton Securities.

The best performing stock in Hong Kong’s market was wind power and telecommunication equipment maker China Energine International, which leapt 18.9 per cent to HK$0.63.

China Aerospace International Holdings jumped 3.2 per cent to HK$0.98. AviChina Industry & Technology climbed 2.3 per cent to HK$5.85. CSSC Offshore and Marine Engineering Group added 0.6 per cent to HK$12.8.

In mainland China markets, ship makers and aerospace-related shares also surged.

Sainty Marine Corp gained 5 per cent to 9.65 yuan. China Aerospace Times Electronics climbed 1.9 per cent to 17.53 yuan. Hunan Jiangnan Red Arrow rose 0.9 per cent to 16.23 yuan and China Shipbuilding Industry rose 0.4 per cent to 7.19 yuan.

Also boosting the risk appetite were expectations that Japan may unveil additional stimulus measures after Prime Minister Shinzo Abe’s ruling coalition won a landslide victory in Sunday’s upper house election. Japan’s Nikkei jumped 2.5 per cent at the close, extending a 4 per cent rally on Monday. Overnight on Wall Street, the S&P500 closed at a record high of 2,137.16, after touching a historic intra-day high of 2,143.19.

“Investors have largely regained confidence toward the US economy after last week’s non-farm payroll figures. However, in China, many people are still on the sidelines as China is due to release a raft of key indicators this week, including Wednesday’s trade data and Friday’s GDP figures, ” said analysts from Bright Smart Securities.