Daily Report

Chinese stocks snap six-week losing streak but gains not seen as sustainable amid weaker yuan risk

Gains driven by MSCI speculation but could be short-lived with yuan depreciation weighing on markets

PUBLISHED : Friday, 03 June, 2016, 9:28am
UPDATED : Friday, 03 June, 2016, 6:26pm

Mainland Chinese stocks broke a six-week losing streak on Friday as the market rallied on speculation that the index compiler MSCI would include Chinese A shares to its global index in mid-June.

The rally also boosted stocks in the Hong Kong market to extend a three-week gain.

But analysts said the surge in China and Hong Kong is likely to be short-lived as the impact of an MSCI inclusion could be minimal, with a weakening yuan continuing to weigh on markets.

China’s benchmark Shanghai Composite Index closed 0.46 per cent, or 13.45 points higher, at 2,938.68. The index advanced 4.15 per cent, or 117.13 points for the week, snapping a six-week losing streak.

The CSI300, which tracks large companies listed in Shanghai and Shenzhen, edged up 0.7 per cent, or 22.23 points, to 3,189.33. The Shenzhen Composite Index added 0.53 per cent, or 10.07 points, to 1,914.81. The Nasdaq-style ChiNext Index gained 0.75 per cent, or 16.41 points, to 2,204.97.

Alex Wong Kwok-ying, asset management director with Ample Capital, said investors in China are betting on an MSCI inclusion in the emerging markets index in June.

“I don’t think [the gains] are sustainable. It will probably hold on for a few more sessions but the impact should be quite minimal,” he said.

Wong explained that the timing of the inclusion and the weighting of A-shares in the index would determine the impact.

Right now the [yuan] decline is slow and in an orderly fashion, but if we see some more weaknesses, the market could suddenly panic
Alex Wong Kwok-ying, Ample Capital

“If they decide A shares would be included in three months time, that means the market has three months to digest the news – then the impact is very minimal,” he said.

Analysts also highlighted the risk of further weakening of the Chinese yuan that could trigger a sell-off in the equities market.

The yuan softened against the US dollar by 0.36 per cent this week, marking its fifth weekly decline – the longestdownward stretch seen since December.

“I think we need to be cautious. This kind of decline could accelerate,” said Wong. “Right now the decline is slow and in an orderly fashion, but if we see some more weaknesses, the market could suddenly panic. That would become quite negative for stocks.”

Fear of a depreciating yuan has already sparked a surge in southbound trade for mainland investors buying Hong Kong stocks through the Shanghai-Hong Kong Stock Connect scheme.

Southbound trading soared by almost 20 per cent in May, equallingthat of northbound trading for the first time this year, according to figures from Hong Kong Exchanges & Clearing.

The monthly turnover in May totalled HK$51 billion for southbound trading, while global investors buying mainland Chinese shares reached a turnover of 44.5 billion yuan (HK$52.5 billion).

In April, southbound trade lagged behind its northbound counterpart by almost HK$30 billion.

In Hong Kong on Friday, the Hang Seng Index ended at 20,947.24, up 0.42 per cent or 88.02 points. The H-shares index added 0.61 per cent, or 53.43 points, to 8,809.81.

Insurers and software and technology service providers led the gains in the Hong Kong market.

Dah Sing Group, a Hong Kong-based financial services company, said late on Thursday that it will sell its insurance business to Fujian-based conglomerate Fujian Thai Hot Investments for HK$10.6 billion in cash.

The deal is still subject to regulatory approval and shareholders’ agreement, the company said.

Shares of Dah Sing Financial Holdings, which operates Dah Sing’s insurance business, jumped 3.29 per cent to HK$51.8.