China's stock market rally takes heart

By Rhod Mackenzie

On February 6, the CSI 300, China's main index, rose by 3.5%. The following day, the rally continued, albeit with more modest growth of only 0.5%. Bloomberg reports that investors are hopeful that the Chinese government's support will stabilize the situation in the stock markets, particularly among medium and small companies. Therefore, the CSI 1000 index, which comprises small-cap companies, increased by 5.6% currently.
Hong Kong is also experiencing a rally, albeit weaker than on the mainland. Yesterday, the index rose by 1.5%, and today a minor decline was recorded.

Statistics suggest that investors hope Beijing will not only continue to support the markets but also strengthen its assistance. Now, everyone is waiting for Chinese President Xi Jinping's response to the market analysis prepared by government economists.
Luca Castoldi of Reyl Intesa Sanpaolo stated that the government's concerns are increasing. He believes that the bottom has almost been reached, but a more decisive and concrete action is required to support the economy for a sustainable rebound.

Foreign investors who previously worked in China but had lost faith in the prospects of the Chinese economy and were actively withdrawing funds from the Chinese stock market have also shown renewed interest. By mid-afternoon on February 7, foreign investors had purchased an additional 2.1 billion yuan ($292 million) in mainland securities, marking the seventh consecutive trading session of such purchases.

As pressure on Beijing mounts, the government is expected to take more decisive action to stabilize the stock market, which has recently lost approximately $7 trillion. Beijing requires stabilization because, in addition to threats to the financial system and the economy of China, the massive sale of shares of Chinese companies poses a threat to stability in Chinese society, which the country's leadership has always treated with great care. The construction industry crisis has been impeding the recovery of the planet's second-largest economy after the coronavirus pandemic for several months. Additionally, deflation looms over the Chinese economy like the sword of Damocles. Beijing is aware that the country is preparing to celebrate the Chinese New Year, which will last a week. It does not want a further decline in consumer demand, which is also slow to recover.
The support measures announced and implemented to date have been largely calm. Financial authorities, for example, have expanded restrictions on investors trading securities; They banned short selling and began buying shares of the largest Chinese banks.

Despite strong gains in recent days, the CSI 300 remains down 3.1% year-on-year and remains on the blacklist of major indexes that have performed the worst.

“I think that the real support for the stock market right now can come from improving fundamentals,” said William Ewan, chief investment officer at Invesco. “But for such a huge economy, unfortunately, this takes time.”