The bullish mood building in China’s equity market is entering a new phase, with investors flocking to riskier stocks as trading reopened on Monday.
The ChiNext Index closed 3.5 percent higher in Shenzhen for a second straight session, its best two-day performance since October. A gauge of Shanghai-traded large caps added 1.1 percent following the Lunar New Year break. The yuan dropped 0.9 percent as it traded for the first time in over a week and the Bloomberg Dollar Spot Index rose for an eighth day.
Monday’s rally in small caps and stocks in the tech hub of Shenzhen — which was haunted by hundreds of profit warnings in recent weeks — shows investors are shifting into privately-owned stocks in lieu of more defensive state-backed giants. That’s a stark reversal of what happened for most of January. The resilience of onshore markets after the five-day holiday stands out in the wake of declines in Hong Kong.
“Following a wave of goodwill impairments and profit warnings, the worst time for small cap stocks is over,” said Xu Chi, an analyst at Huachuang Securities Co.
The SSE 50 Index rose 9 percent this year through February 1 as investors piled into large firms that were likely to benefit most from Beijing’s measures to support the slowing economy. That’s more than twice the gain of the Shenzhen Composite Index, and compares with a paltry 1.7 percent advance for the ChiNext.
The Shenzhen Composite gained 2.9 percent on Monday, its biggest jump since December 3, while the Shanghai counterpart rose 1.4 percent.
A series of rule changes from China’s securities regulator has also encouraged greater risk-taking in the equity market. Within days of appointing Yi Huiman as its new chairman in January, the China Securities Regulatory Commission said it will scrap an automatic margin call threshold, allow a broader array of collateral to be used for certain loans, lower capital requirements for riskier assets and broaden how foreign investors can use their money.
Technical indicators suggest the coming weeks will be pivotal for China’s equity market after it recovered almost $380 billion this year. A gauge of momentum on the CSI 300 climbed to the highest level in 12 months before the Lunar New Year holiday, while the Shanghai Composite Index finally closed above its 100-day moving average for the first time since last February. In Hong Kong, the Hang Seng Index just rose above the 28,000 key level.