(Bloomberg) — Chinese stocks capped their biggest weekly rise since 2008 as a flurry of trading overwhelmed the Shanghai Stock Exchange, underscoring a radical shift in investor sentiment after Xi Jinping’s government ramped up economic stimulus.
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In an echo of the rally that followed China’s massive stimulus during the global financial crisis, the CSI 300 index of large stocks rose 4.5% on Friday – bringing this week’s gains to 16%. Trading activity was so intense that it led to disruptions and delays in processing orders, according to people familiar with the matter. The Shanghai Stock Exchange said it was investigating these issues, without elaborating.
It was a hectic end to a week that raised hopes that China’s stock market would reach a low of $8.9 trillion after years of losses that made it one of the world’s worst-performing stocks. Chinese authorities unleashed a long-awaited barrage of monetary stimulus on Tuesday, followed by pledges from top leaders to do what is necessary to support the housing market and boost consumption.
While many details of China’s stimulus plan remain unclear, and previous bouts of euphoria have often faded, market watchers say the fear of missing out on the ongoing rally is becoming clear. With Chinese markets closed next week for the Golden Week holiday, local investors may be concerned that the rise in Hong Kong may continue during their absence, said David Chow, a strategist at Invesco Asset Management.
“FOMO is rising for investors as Chinese stocks are close to 10% in the past three days,” he said. “Based on historical valuation, we believe Chinese stocks have another 20% run.”
Hong Kong’s Chinese stock index rose 3%, notching its longest winning streak since 2018. The ChiNext index, a technology-heavy gauge, rose a record 10%. The turnover on the mainland exceeded 1.4 trillion yuan (200 billion US dollars), reaching its highest level in three years, despite the trade problems. Trading value in Hong Kong reached HK$445 billion (US$57.2 billion), an all-time high. Meanwhile, US-listed Chinese companies were poised to extend their gains at the open as they rose in pre-market trading on Friday.
As investors turned to risky assets rather than safe havens, long-term Chinese government bond futures saw their biggest daily loss on record on Friday. The yield on Chinese 10-year bonds rose 5 basis points to 2.16%.
The rise has severely hurt a number of quantitative hedge funds in China, people familiar with the matter said. Some companies suffered losses because they shorted index futures for so-called direct market access strategies, said the people, who requested anonymity to discuss a private matter. Another person said that in some cases, losses were compounded by an exchange glitch that left them unable to sell their holdings to meet margin requirements.
The shift by Chinese authorities this week prompted billionaire investor David Tepper to announce that he is buying more of “everything” related to the country. “I thought what the Fed did last week would lead to monetary easing in China, and I didn’t know they were going to bring out the big guns like they did,” he said in an interview with CNBC on Thursday. “We’ve been getting more Chinese stocks for a little bit longer.”
Guidelines issued by the Securities Regulatory Authority to encourage companies to attract long-term investors also added to the optimism already clouding the market.
The broad rise was underscored Friday by 266 of the CSI 300’s 300 index members ending the day in the green, with spirits maker Kweichow Moutai and battery maker Contemporary Amperex Technology Co. leading the rise.
But Chinese banking stocks bucked the rally and fell, as investors weighed the implications of a 1 trillion yuan ($142 billion) capital injection plan reported by Bloomberg News. China plans to inject funds raised mainly from issuing new private sovereign bonds, the report said, citing people familiar with the matter.
The infusion plan could dilute return on equity by 56 basis points, JPMorgan analysts including Katherine Lee wrote in a note. The recession may also reflect a shift away from sectors that were seen as more resilient when the market was down; With some of the highest dividend yields in the country, Chinese banks have appealed to investors looking for stable returns.
Some investors are looking for signs of more fiscal stimulus to drive the next phase of gains. “We can expect financial measures as well,” said Raymond Chen, fund manager at ZiZhou Investment Asset Management. “This certainly leaves a lot of cynics behind.”
Morgan Stanley is among a large number of China watchers who have gradually turned bullish, with strategist Laura Wang and her colleagues seeing another 10% rise for the CSI 300 in the short term. Just days ago, the Wall Street bank dropped its preference for domestic stocks over their overseas counterparts, citing the lack of supporting factors such as state buying.
Optimism also lifted other Asian stocks with exposure to the world’s second-largest economy as risk-on sentiment intensified across the region.
-With assistance from Winnie Hsu, Abhishek Vishnoi, and Subrat Patnaik.
(Updates to add quantitative hedge funds in eighth paragraph.)
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