Chinese equities rebound on hopes of support from Beijing

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Chinese equities staged a rebound on Tuesday as state funds vowed to step up share purchases, spurring investor hopes that Beijing might be ready to offer more support to put a floor under months of sliding prices.

Shares began climbing after Central Huijin, an investment arm of China’s sovereign wealth fund, said it would expand its purchases of exchange traded funds.

The China Securities Regulatory Commission also said it would encourage institutional investors to hold A-shares for a longer period of time, as it worked to stabilise a sell-off that has wiped out almost $2tn in market capitalisation from a 2021 peak.

The CSRC said it would punish “malicious” short selling and stop “illegal behaviour” that hindered stable stock market operations. It further barred securities lending and short selling in a separate notice. It also vowed on Monday to closely monitor the risk of forced liquidations on pledged shares.

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The onshore benchmark Chinese stock index CSI300 closed 3.2 per cent higher on Tuesday. The broader CSI500 index and its small-cap counterpart CSI1000 index both closed about 7 per cent higher following Central Huijin’s announcement.

The Hang Seng index closed 4 per cent higher, its biggest rise since July 25, while the Hang Seng Tech index closed with gains of 6.8 per cent.

The sell-off in China’s stock markets has underlined the lack of confidence surrounding the economic outlook for the world’s second-largest economy, after months of weak consumer demand and indicators suggesting that industrial activity was struggling to rebound.

Despite previous efforts from Beijing to shore up the market and extensive trading restrictions for short coverings, Chinese markets recorded a brutal start in 2024. Last week, the CSI300 plunged 4.6 per cent to close at a five-year low on Friday. 

Retail investors, who bought into some Rmb300bn worth of derivatives called “snowballs” tied to small-cap stock indices such as the CSI1000, suffered huge losses after the recent rout.

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More than 100 listed companies have topped up cash or collateral in the margin trading accounts as they faced forced selling of stocks, said the market regulator on Monday.

“The market grapples with complexity amid a distressed property sector, fiscal constraints of local governments, and a lack of confidence in the private sector,” said Redmond Wong, chief China strategist at Saxo Markets.

Despite the erosion of confidence in Chinese equities, Beijing has taken incremental steps to shore up sentiment and has held back from a significant intervention or stimulus package.

“The market has such a deep confidence issue that we need more dramatic and direct support, such as having the national team taking the lead in buying up the market,” said Wang Qi, chief investment officer for wealth management at UOB Kay Hian in Hong Kong. “The government can’t expect investors to buy in with such wishy-washy measures.” 

Wang added: “The longer the government waits, the higher the cost.”

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Zhang Qi, analyst with Haitong Securities, said investors would need to see more from Beijing for a sustained rally.

“The key for reviving confidence still lies in the recovery of the economy,” he said, “investors need to see the rebound in consumption, exports, employment and incomes, the efforts cannot be made only from the statistics bureau.”