Foreign investors are piling into Chinese stocks. Is the market turning a corner?
There are some clear near-term tailwinds for stocks as regulators crack down on other asset classes. But investors betting on a further jump in the yuan might be disappointed.
Chinese market benchmark CSI 300 rose 3.2% Tuesday, the biggest one day move in almost a year. That has put the index into positive territory for the year, but it’s still lagging behind most other major markets. The S&P 500 is up 11.7% in 2021. China’s market is still 8% off its February peaks.
Offshore investors are behind the rally: They bought the net equivalent of $7.1 billion of Chinese stocks since Tuesday through the Stock Connect platform, which allows investors to access mainland shares through Hong Kong. That was the highest three-day inflow since the trading link’s launch in 2014.
The yuan has also appreciated below 6.4 per dollar this week, its strongest level since 2018. That is mostly down to dollar weakness, though the yuan has also done better than most other major currencies this year. Recent comments from some researchers at China’s central bank may have triggered hopes that Beijing could allow the yuan to strengthen further. One said that China should stop controlling the exchange rate, while another suggested appreciating the yuan to offset rising prices in imported commodities.
Yet those comments shouldn’t be taken as official policy. A stronger yuan may alleviate inflationary pressure, but this could hurt exports, which have been a key part of China’s economic recovery from the pandemic. An essay in state media on Wednesday rejected the idea that an appreciating currency should play a key role in fighting commodity price inflation.
There may still be a tactical case for Chinese stocks in the near term as the market remains highly driven by momentum. China’s recent crackdown on speculation in other assets such as commodities and cryptocurrencies may have driven some flows into the stock market.
sentiment indicator on the Chinese stock market, which looks at data such as turnover and margin transactions, saw a sharp increase Tuesday. The CSI 300 went on to gain 7.8% on average in the following six months after similar or bigger jumps, according to the bank.
But investors should also keep in mind that the fastest part of the Chinese recovery is already past and credit growth is ebbing. Chinese stocks are due for a catch-up with other markets, but the wind may quickly turn chilly again.
Write to Jacky Wong at JACKY.WONG@wsj.com
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Appeared in the May 28, 2021, print edition as ‘Chinese Stocks Present a Fleeting Opportunity.’