China stock rebound shows cracks, spoiling traders’ holiday mood

HONG KONG: A small-caps crash. Dizzying rebounds. And cooling gains. Yet another wild week for Chinese stocks has left investors yearning for more policy support as they remain unconvinced the market has reached a bottom.

Beijing’s intensified efforts to halt the equity rout helped the benchmark CSI 300 Index stage a sharp rebound but its gains slowed before the market shut for the Lunar New Year break.

A slide in Hong Kong-listed Chinese shares last Friday further signalled that scepticism is still running high, dampening the holiday spirit.

Investors are bracing for more losses once the onshore market reopens on Feb 19 unless authorities offer reassurance that further support will ensue.

The rescue steps taken so far – from state fund purchases to restrictions on short selling – have been more of band-aid measures than fundamental fixes to economic woes, traders say.

“Market sentiment has improved slightly, but the sustainability relies more on improvements in economic activities and corporate earnings,” said Fanwei Zeng, an investment analyst at GAM Investments in Hong Kong.

Policy support rushed in just before traders headed home to reunite with family – with even the securities regulator chief replaced – a sign that authorities saw an urgency to stop the rout and prevent the gloom from spreading.

The moves have worked, to some extent. The CSI 300 capped its best week since late 2022, thanks largely to a 3.5% surge last Tuesday.

Small-cap equities – which have led the selloff in the new year – bounced back more strongly, with the CSI 1000 Index advancing 9% in its biggest weekly jump since 2020. Overall, the Chinese market added more than US$450bil in value.

Many investors say that the gains onshore have partly been driven by state-fund purchases and short squeezes, rather than a return of real money.

Margin lending curbs forced short sellers to close out bearish positions in small-cap exchange-traded funds, according to Bloomberg calculations.

Put options on the Hang Seng China Enterprises gauge accounted for about 40% of the average volume over the past five days, which show a lingering bearish mood.

“Sentiment has only modestly improved given all the news that has come out but I suspect that this was more about short covering and not necessarily a change in views of the equity markets,” said Ken Wong, an Asia equity portfolio strategist at Eastspring Investments Hong Kong Ltd.

“We will need to see more policy announcements to help improve sentiment.”

There are few signs that China’s economy is getting back on track.

Deflation is deepening, the real estate sector remains mired in a crisis and manufacturing activity remains in contraction.

What’s needed, investors say, is a growth-first policy mindset with significant fiscal stimulus, but that’s unlikely as China has pivoted away to a so-called high-quality growth model and authorities have signalled they won’t lean on big debt-fuelled stimulus.There is “clearly scope” for more selling by foreigners ahead if sentiment remains weak, according to strategists at Nomura Holdings Inc. — Bloomberg