Chinese stocks snap rally as investors turn sceptical over state support

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Chinese stocks snapped a three-day winning streak as a pledge from the country’s premier to deliver “more forceful” state support for the market failed to translate into concrete steps to prop up share prices.

The benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks closed 0.3 per cent lower on Friday after posting gains of almost 4 per cent over the previous three sessions, while in Hong Kong the Hang Seng China Enterprises index dropped 2 per cent.

Shares in China and Hong Kong, which have badly lagged behind global peers since July, had rallied earlier this week after Li Qiang, the country’s premier, called for “more forceful and effective measures to stabilise the market and boost confidence”.

But traders and strategists said the resulting boost to sentiment had ebbed in the absence of solid evidence that authorities were taking meaningful action to match Li’s assertions.

“There’s a bit of a game theory at play,” said Mohammed Apabhai, head of Asia trading strategy at Citigroup. “Policymakers come out with an announcement, the market rallies in anticipation of those measures, which could potentially take the pressure off policymakers to do anything bigger. It would likely take a bigger, more violent sell-off to prompt serious policy action.

“At this moment, I think that people who’ve bought [Chinese equities] in the last three days may be forced to sell again,” he added. “Although I’m probably the least bearish I’ve been in the last three years, it’s still not the time.”

The falls also came after strategists at Morgan Stanley cut their 12-month forecast for the MSCI China index of global Chinese listings to 53 from 60, matching the gauge’s closing level from Thursday and breaking with other Wall Street investment banks’ expectations for an outsize rally this year.

Global investor appetite for Chinese equities has been severely tested since July, when top leaders’ promises for more substantial economic policy support were undercut by a series of defaults in the property sector, prompting almost all of the foreign money that had flowed into China’s stock market last year to flow back out.

The Morgan Stanley strategists said an unresolved debt pile faced by Chinese developers, an ageing population and falling consumer prices, “as well as complex multi-polar world dynamics” would probably keep valuations of Chinese stocks “at relatively low levels going forward”.

The downsized forecast contrasts with other large western lenders, many of which have pencilled in a sizeable rally for the Chinese market in 2024. Goldman Sachs has forecast the MSCI China gauge to end the year at 63, up about 20 per cent from its current level.

The losses on Friday followed a move by US lawmakers on Thursday to introduce legislation to block some Chinese biotech companies from contracts with the US federal government.

Among the biggest losers in Hong Kong on Friday were WuXi Biologics and WuXi AppTec, down about 18 per cent and 16 per cent respectively, after being named in the proposed legislation.