China Reopening Rally Hits A Stumbling Block

By John Liu and April Ma, BBG Markets Live strategists and reporters

The reopening euphoria that vaulted a key Chinese benchmark to the brink of a bull market is losing steam, highlighting investor caution about the pace of economic recovery.

China’s stock market performed poorly last week even as data during the Lunar New Year holidays showed consumers are venturing out again and a slew of economic data beat estimates.

The CSI 300 benchmark snapped a four-week winning streak, while the Shanghai Composite Index’s 0.7% drop on Friday was its steepest in nearly seven weeks. The Hang Seng China Enterprises Index finished its worst week since October with a 5% drop.The planned overhaul to China’s IPO rules that would make it easier for companies to list onshore, hailed a “significant milestone” by Goldman Sachs, also failed to lift sentiment. Instead, investors worried about the potential oversupply of stocks.

“Sentiment in the weeks before the Lunar New Year holiday was lifted by expectations of a spending splurge over the holiday, but the reality wasn’t as brilliant as expected,” said Du Kejun, fund manager at Beijing Gelei Asset Management Center Limited Partnership. “Investors may look to first-quarter figures for more conviction, but I think hesitation is normal when the market is shifting out of bear mentality.”

 

Overseas funds are also becoming more cautious as they turned net sellers of Chinese stocks on Friday, ending 17 straight sessions of buying. That came after global funds added 141.2 billion yuan ($21 billion) worth of mainland shares in January, the biggest monthly inflow on record.

Analysts also say traders tend to take profit after a rally nears the 20% milestone, which heralds a technical bull market. Gains in the CSI 300 Index fizzled last summer after they hit 19%, and the gauge of mainland shares pulled back from the brink of a bull market twice last week as investors awaited new catalysts.

 

Still, long-term investors believe there is further upside for China stocks once the economy starts to deliver growth. “While some like to wait and see for now, we don’t doubt that there are still opportunities,” said Liu Dejun, managing director at Beijing Guanghua Private Fund Management Co.

For now, some hesitation is reasonable. China holds a key political meeting in March, where more clarity on the new leadership and the policy direction will be offered. “Some volatility helps to keep a level head, and long term investors don’t really like huge beta from index moves,” said Liu.