Bull market lures Chinese stock traders as consumption rises

(Bloomberg) — A four-week rally in Chinese stocks is expected to turn into a bull market when trading resumes Monday as a rebound in consumption boosts stocks.

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The CSI 300 Index could extend its 19% gain from its October low as traders return from a week-long Chinese New Year holiday, with travel and cash register data indicating consumer spending is on the mend. Hotel operators and restaurant chains will benefit, as will travel agencies and entertainment-related names.

A continued uptrend may dispel any lingering doubt that the worst is over for Chinese stocks after previous upswings were cut short by rising Covid cases. The rollback of virus restrictions and a Beijing policy pivot have won over Wall Street banks like Morgan Stanley, which expects Chinese stocks to outperform global counterparts by 2023.

The gains are likely to “continue as the economic recovery will continue into 2023 and investor positioning has yet to be supplemented following the capitulation sale last fall,” said Redmond Wong, strategist at Saxo Capital Markets HK Ltd. are supported by declining US inflation, a potential pause in Federal Reserve tightening and a better-than-expected European economy, he added.

The CSI 300 index is up nearly 20% since the reopening rally began in November, trailing a 57% gain in the Hang Seng China Enterprises Index, which tracks Chinese stocks listed in Hong Kong. The return of foreign buyers has been a key driver for onshore stocks, with inflows to the north capping the longest daily run to January 20 since May 2020.

According to Marvin Chen, an analyst with Bloomberg Intelligence, mainland stocks could gain further momentum if Stock Connect flows resume on Monday.

“There may be some catch-up gains,” Chen said. “Holiday spending has recovered somewhat and there may be some transfer of global market sentiment as the interest rate hike cycle nears its end.”

Expenses Spree

The upswing is fueled by optimism that China’s outlook is improving after data from industrial production to retail sales in December highlighted the economy’s resilience. Earlier this month, Deputy Prime Minister Liu He said growth this year is likely to return to its pre-pandemic trend.

Spending patterns during the Chinese New Year holiday bolster optimism. Travelers swarmed to China’s scenic destinations during the holidays, box office sales soared, and bookings of hotels, guesthouses and tourist spots surpassed the comparable period in 2019.

China Holiday Travel, Box Office Rebound After Covid Zero (1)

At the same time, film-related stocks such as IMAX China Holding Inc. and Maoyan Entertainment in Hong Kong when trading resumed in the city on Thursday. Sportswear manufacturer Li Ning Co. and hot pot chain Haidilao International Holding Ltd.

Other assets have also risen, with the offshore yuan on track to rise for a third straight month amid bullish calls from the likes of Goldman Sachs Group Inc., Commerzbank AG and HSBC Holdings Plc.

Still, some investors warn that a new wave of virus cases could cloud the outlook.

“We would like to see the number of Covid infections fall rapidly in China after what is likely to be an increase in cases caused by Chinese New Year travel, paving the way for more robust economic growth,” said Kristina Hooper, chief global market strategist at Invesco Ltd. .

More incentive

But in the near term, demand for Chinese stocks may hold up as traders gear up for more growth-enhancing policies to be announced at annual political meetings in March, according to Steven Leung, executive director of UOB Kay Hian (Hong Kong) Ltd.

The MSCI China Index, which includes both onshore and offshore stocks, trades at a P/E ratio of 10.4 times. That is still lower than the historical average of 11.6 times.

“You could argue that the market is a bit expensive now after a sharp rally, but I don’t think all the good news is fully priced in yet, especially in terms of regulation,” Leung said.

–With help from Jeanny Yu and Tania Chen.

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