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The Bund Bull statue and a screen displaying a thank you message for healthcare workers in Shanghai on June 1 when the city ended a lockdown. Photo: Bloomberg

China’s US$1.3 trillion stock rebound rewards contrarian funds with three barriers challenging path to next level

  • A technical barrier is approaching as the Shanghai Composite Index attempts to scale 3,400 points, a level associated with large trading volume and price retreat
  • Industrial output and retail sales probably weakened last month, among key economic data this week to test investor appetite
A US$1.3 trillion rebound in Chinese onshore stocks from April’s sell-off is fuelling belief that the market is past its worst slump this year. The next struggle will be overcoming a technical market barrier and pessimism over corporate earnings and the economic outlook.

Investors should consider selling into the latest recovery as earnings and valuations come back into focus, Manulife Teda Fund Management said. Local shares could also drift sideways on sluggish economic data, according to HSBC Jintrust Fund Management and China International Fund Management.

The euphoria following the end of citywide lockdown in Shanghai has helped yuan-denominated stocks outpace returns in markets elsewhere. The Shanghai Composite Index has climbed 14 per cent from the lowest point in April, while the ChiNext gauge of smaller companies in Shenzhen surged 19 per cent. Benchmarks in the US and Asia-Pacific fell by 0.1 to 6.6 per cent over the same period.


Shanghai residents confront officials after swift return of lockdown

Shanghai residents confront officials after swift return of lockdown
“Investors should stick to haven plays, such as low-valued brokerages and banks, as we approach a technical resistance,” Manulife Teda, which manages US$9 billion in assets, said in an emailed comment.

While the rally has paid off for foreign funds rushing back into the A-share market, the gauge is coming up against the 3,400-point barrier. The level attracted a spike in trading volume and heavy sell-offs in the past, with the Shanghai Composite spending about 10 months trading around the level last year.

So far, market contrarians have been well rewarded for buying Chinese equities near the end of capitulation. Foreign investors were net buyers for a 10th straight day through Friday, the longest streak since December, scooping up 66.1 billion yuan (US$9.9 billion) of onshore equities via the Stock Connect link with Hong Kong.
An investor watches stock prices board inside a brokerage house in Huaibei, Anhui province. Photo: Shutterstock

As valuations expand with the stock rally, investors should not be too upbeat about the broader market given the likely flow of weak economic data, according to Cheng Yu at HSBC Jintrust. That also applies to the Hang Seng Index, which has advanced 18 per cent from a six-year low on March 15.

Several key economic reports this week could further test investors’ appetite for risk as authorities in Shanghai ordered more mass testing to stem another Covid-19 outbreak. Industrial output probably contracted 1 per cent in May from a year earlier while retail sales shrank 7.1 per cent, according to the consensus forecasts of economists tracked by Bloomberg.

Earlier reports showed Chinese manufacturing and services industries contracted during lockdowns.

China remains steadfast in its zero-Covid policy. The popular view is that it will be enforced until the end of the year despite the huge economic toll and the harsh lessons from the Shanghai lockdown.


Residents in Beijing satellite city protest against Covid rules limiting acess to Chinese capital

Residents in Beijing satellite city protest against Covid rules limiting acess to Chinese capital

“Investors will need to heed corporate earnings data,” said Cheng, a fund manager at HSBC Jintrust based in Shanghai. “We will need to see listed companies deliver on earnings growth.”

Shoring up demand from consumers and investors will be the top priority of Beijing’s policymakers amid a dire economic outlook, according to Wang Qi, chief executive officer at Mega Trust Investment in Hong Kong. Beijing has taken steps to restore confidence, including cutting mortgage rates for first-time homebuyers and introducing tax breaks on car purchases.

“The key challenge for China’s monetary policy is demand not supply,” said Wang. “The effectiveness of credit easing will largely depend on loan demand, which in turn, is a function of consumer and corporate confidence.”

China’s ongoing recovery is different from its strong and swift bounce-back from the Wuhan outbreak in 2020, which was aided by a booming property market and robust external demand, according to TS Lombard, a London-based research firm.

China’s economy will contract by 1.2 per cent this quarter and full-year growth will be 3.3 per cent, it forecasts, citing wobbling home sales and the spillover effect of policy tightening in developed economies. The infrastructure stimulus to cushion the slowdown will be offset by the zero-Covid approach that restricts mobility and undermines confidence.

“The stock market is likely to be rangebound in the near term,” said China International Fund Management in a report on Thursday. “It would be difficult for stock picks as the sector rotation is happening pretty fast. Investors will need a long-term horizon to position for the theme of stabilising growth.”