China Shares Rise but Uncertainty Hovers
Greece inches closer to deal with creditors, but investors are wary of sustained China recovery
China shares rose Friday, and other Asian markets made tentative gains, as investors assess whether a recovery in Chinese stocks proves sustainable.
The Shanghai Composite rose 5.2% to 3900.89, though the index is off 24.5% from its June high. The smaller Shenzhen market gained 4% to 2033.61, and is 35.3% lower than its peak last month. Just under half of all stocks remained suspended on Friday.
The small-cap ChiNext board gained 4.1% to 2535.79, but remains down 36.3% from highs in June.
In Hong Kong, stocks extended a recovery into a second day as the Hang Seng Index rallied 2.1%, while a gauge of Chinese companies listed on the city’s stock exchange, known as H-shares, rose 4.3%
Two of Beijing’s many measures to stabilize the market appear to be behind Shanghai’s day-and-a-half rally, said David Cui, head of China equity strategy at Bank of America Merrill Lynch.
First, China’s central bank’s decision to pledge liquidity to a regulator-owned firm that helps fund margin trading amounts to de facto quantitative easing, he said, bringing much-needed liquidity to the market. Moreover, news on Thursday that Chinese police were investigating “malicious’ short selling ran wild on social media, giving investors looking to make a quick profit reason to jump in, he added.
Others say the selloff has brought the valuations of some Chinese stocks back to earth, giving investors reason to buy.
“Some companies’ valuations are going to back to reasonable levels,” said William Ma, deputy chief investment officer at Gottex Penjing Asset Management, a fund-of-funds manager. At their peak, highflying Chinese technology stocks, for example, had price-to-earnings valuations roughly two-thirds above Nasdaq stocks during the dot-com bubble of 2000.
Whether the rally, which puts the Shanghai Composite on track for a weekly gain after three successive weeks of losses, can overcome the steep declines that wiped out trillions in value from Chinese equities over the past four weeks remains uncertain.
“I doubt the market will enjoy a sustained rally,” said Mr. Cui. The damage from the recent selloff “will extend far beyond the stock market,” with banks and brokerages’ balance sheets weakened and consumer spending likely to deteriorate.
This week, China has cracked down on short sellers, encouraged buying of small-cap stocks and, through its central bank, pledged more liquidity to China Securities Finance Corp., which lends to brokerages that fund investments with borrowed money. Yet some say Beijing’s heavy-handed intervention still has a long way to go to reverse a broader selloff. Confidence is wearing thin among global investors, with state intervention only adding to the volatility of the Chinese stock market.
“With more than half of listed companies having suspended trading in their shares, it’s hard to be confident that any moves are other than transitory,” Tim Condon, an analyst at ING, wrote in a research report. Companies can request a trading halt under certain conditions, such as a takeover or restructuring, or a stock exchange can impose a suspension if it sees the need.
Oil prices recovered after weakening amid concern that China’s stock selloff is illuminating deeper economic problems. Nymex crude futures rose 0.6% to $53.13, extending a recovery started Tuesday. posting a recovery Thursday. Some industrial commodities like copper have hit multiyear lows this week, though the metal is stable in trading on Friday. Even gold, often perceived as a haven asset, is trading near five-year lows. China is one of the world’s largest consumers of oil and metals.
Elsewhere, Japan’s Nikkei 225 Stock Average rose 0.4%, while Australia’s S&P/ASX 200 is up 0.7%. In South Korea, the Kospi Composite climbed 0.1%.
Meanwhile, the euro held steady against the U.S. dollar and the yen, as Greece’s new proposal for economic overhauls and budget cuts tiptoed closer to creditors’ demands, ahead of a deadline this weekend for a deal. Eurozone leaders will evaluate the country’s proposals during crisis meetings on Saturday and Sunday.
Source: Bloomberg – China Shares Rise but Uncertainty Hovers
