It’s been a long time coming but mainland Chinese stocks have risen to their
highest in a decade amid appealing valuations and low deposit rates. The strength of the rally surprised some but may be seen as a delayed effect from last September when the government launched a comprehensive
stimulus package, after an off-schedule Politburo
meeting that further signalled Beijing’s resolve to stimulate growth.
That triggered a stock market rally but it did not last. Now, however, with strong corporate earnings
anticipated and a revived risk appetite from both foreign and domestic investors for Chinese equities, the rally is back.
Beijing’s policy support has seen mainland-listed companies snapping a streak of 15 consecutive quarterly profit declines last year. From lows in April caused mostly by US President Donald Trump’s “Liberation Day” shock tariffs, the CSI 300 Index of yuan-traded stocks has rebounded by 19 per cent, Hong Kong’s Hang Seng Index by 26 per cent and the Nasdaq Golden Dragon China Index by 23 per cent. A Chinese-American truce in the tariff war has helped calm investors. A-share account openings have surged by 37 per cent so far this year.
Tech stocks have been a bright spot, covering industries such as electronics, computing, new materials, robotics and digital machine tools that have been involved in Beijing’s drive for self-sufficiency. Market darling Wuxi AppTec became the
best performer on the CSI 300 Index after the biotechnology firm reported a 106 per cent jump in first-half net profit year on year. Bellwether tech giant Xiaomi also reported a
record net profit of 10.8 billion yuan (US$1.5 billion) in the second quarter, up 75.4 per cent year on year, well exceeding the 8.88 billion yuan forecast by analysts.
More companies are expected to report good earnings as they recover from the post-Covid slump, so the rally may extend. The average price-to-earnings ratio is still about 15, and valuations are not yet stretched. With interest rates on one-year bank deposits
below 1 per cent since May, and 160 trillion yuan still sitting in household deposits, there could be accelerated flows from bank deposits to stocks and shares.
Hong Kong has been both the beneficiary and facilitator of the mainland rally. The Stock Connect through the local bourse has been a key conduit for both foreign and mainland Chinese investors, creating a virtuous circle of cross-border investment. Though not restricted to equities, that is how the idea of the city serving as a “superconnector”, long championed by the Hong Kong government, is supposed to work. Meanwhile, with state policies continuing to be accommodative, this rally may have legs.
