Chinese stocks set for muted reopening after Hong Kong surge

(Bloomberg) – Chinese stocks appear poised for small early gains as they return from a week-long holiday, supported by a rise in Hong Kong-listed names and easing concerns over regulatory headwinds for the market. the country’s struggling tech sector.

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A U.S.-listed exchange-traded fund that tracks the benchmark CSI 300 index gained 1.6% this week, the most in about two months, while Hong Kong’s Hang Seng China Enterprises Index jumped by nearly 3% on Friday in its first post-Lunar New Year session. Pause.

The CSI 300 had fallen into a bear market amid a $1.2 trillion rout just before the holidays, as worries about a weak economy and debt problems in the real estate sector outweighed the monetary easing from Beijing.

Given their weakened correlation with offshore markets, mainland equities could struggle to follow any initial upward momentum unless policymakers take more steps to restore investor confidence, including fiscal spending. stronger and a further easing of credit. How China’s central bank handles liquidity after its usual pre-holiday pump priming will also offer clues.

“So-called A-share correlations with offshore are declining and as such offshore market conditions will not determine their near-term direction,” said Hao Hong, chief strategist at Bocom International, referring to stocks. from the continent. “Even if at the open A shares are lifted due to buoyant general sentiment during the Lunar New Year, I would not pursue it and the technical rebound will be fleeting and non-negotiable.”

Mainland traders will return from their long hiatus in the face of challenges ranging from weak local manufacturing and housing data to a growing camp of hawkish foreign central banks.

The monetary policy divergence between Beijing and Washington – touted as one of the main reasons global brokerages are bullish on Chinese stocks – has yet to lead to significant gains, with the rate falling interest last month failed to excite local traders. . Concerted efforts by the securities regulator, state media and mutual funds to boost investor morale have also been in vain.

“We expect Chinese markets to remain weak as they reopen,” said Gary Dugan, managing director of the Global CIO Office in Singapore. “Economic activity appears to have been affected by continued and potentially more aggressive restrictions given the omicron outbreak and the need to control pollution around the Winter Olympics.”

Yuan, Credit Markets

In currency markets, the onshore yuan is expected to catch up with other Asian currencies given the greenback’s pullback, likely opening stronger, according to Mitul Kotecha, chief emerging markets strategist Asia and Europe at TD Securities in Singapore. The yuan hit a record high against a basket of peers last month.

Traders in the credit space are watching for signs of further stress among property developers, after at least two of them missed payments on dollar government bonds for the first time in January. They are also seeking clarification on funding issues, including potential asset sales and signs of political support.

READ: Stressed Chinese developers get bond payment break in February

PBOC

In addition to economic indicators such as private sector manufacturing activity and loan growth, immediate attention will be paid to how much additional liquidity the People’s Bank of China will withdraw from the financial system now that the seasonal surge in demand for liquidity is finished.

“Although the PBOC has a history of mopping up liquidity injected ahead of the holidays, the market may be hoping for only a partial pullback this time around given the accommodative monetary policy,” Frances Cheung, equity strategist rates at Oversea-Chinese Banking Corp.

She expects the yield on 10-year government bonds to move in a range of 2.6% to 2.8% “over a horizon of several weeks”.

READ: China’s global bond rally may have run its course

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