Chinese shares hit 5-year high on growing optimism over economy

Chinese stocks have rallied to a five-year peak on growing evidence the world’s biggest emerging market is recovering from the coronavirus blow.

The CSI 300 benchmark index of Shanghai and Shenzhen-listed shares rose 1.9 per cent on Friday to end the week at its highest level since June 2015. Further signs of a rebound in the economy boosted sentiment as China indicates it has contained the spread of Covid-19 to some degree.

The Caixin/Markit purchasing managers’ index showed that activity in China’s services sector rose in June at its quickest pace in more than 10 years as loosening coronavirus-related curbs led to a resurgence in consumer demand.

The survey noted that Chinese “businesses were highly confident about the economic outlook” but that employment continued to fall. It would take “time for the economy to fully recover”, it added.

“Thus far, China’s Covid-19 case counts appear under control and the reopening of the economy is relatively successful,” strategists at Bank of America said.

The last time Chinese equities traded at a stronger level was during a turbulent period in 2015 when share prices soared before crashing on concerns over the health of its economy.

Line chart of US dollar terms, rebased showing Chinese stocks outperform US and European peers in turbulent 2020

Mobeen Tahir, associate director of research at fund house WisdomTree, said the recent rally in Chinese equities had been supported by fiscal support from the government and central bank monetary policy as the country recovered from the pandemic.

“Chinese markets were waiting for good economic data to come out. They hadn’t moved in anticipation of good data — they moved in reaction to it.”

The data should be taken with a pinch of salt, he said, since PMIs measure activity compared with the preceding month, which was depressed. Future readings on employment levels, inflation and gross domestic product will give a better gauge of the economy’s health, he added.

China’s CSI 300 has outperformed its US and European counterparts. The gauge of stocks traded in mainland China has risen 4 per cent during 2020 in US dollar terms, having taken a less severe stumble earlier in the year due to coronavirus, FactSet data show.

In comparison, Wall Street’s S&P 500 is down 3 per cent for the year, while the European Stoxx 600 is off 11 per cent.

The Stoxx 600 was little changed in morning dealings on Friday, while US share markets were closed for the July 4 holiday.

Wall Street stocks rose overnight after a report showed US employment increased sharply for the second month in a row in June, helping to partially offset a historic 20m plunge in April.

Rising tension between Beijing and Washington remained a source of concern for investors, traders in Asia said. The US is in the process of rescinding Hong Kong’s special trade status after Beijing imposed a controversial national security law on the Asian financial hub and the US Congress has passed a bill that would sanction officials and banks deemed to have interfered in the city’s autonomy.

Investors said markets were unlikely to have priced in a collapse of the “phase-one” trade deal between the US and China. “Financial markets are failing to recognise this very fat tail risk, and how close it may be to transpiring,” said Michael Every, global strategist at Rabobank.