China shares’ rally fizzles as traders reevaluate stimulus bets

(Bloomberg) — A rally in onshore Chinese stocks on their return from a weeklong vacation has ended as traders questioned Beijing’s resolve to add more stimulus. Hong Kong shares fell.

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The benchmark CSI 300 was up about 5 percent in about 90 minutes of trading on Tuesday, after rising nearly 11 percent in the first few minutes. The measure won for nine consecutive sessions through Sept. 30 before heading into the Golden Week holiday. A gauge of Hong Kong-listed Chinese shares fell as much as 11%% after rising by almost the same amount during the period when onshore markets were closed.

A news conference Tuesday by China’s top economic planner — the National Development and Reform Commission — to discuss a package of policies aimed at boosting economic growth had little to offer.

“The durability of this China rally will depend on the actions that follow the words on the fiscal side of the equation,” said Aleksey Mironenko, global head of investment solutions at Leo Wealth in Hong Kong. “The key thing we’re looking at going forward – what policies will be announced in the coming weeks after the Politburo and State Council statements? This will determine whether our overweight is a tactical one – to be removed as relative valuations change – or a strategic one.”

Even before mainland markets reopened, skepticism grew about the rally in Chinese stocks over the past two weeks. Many strategists and fund managers around the world have viewed the recent rebound with skepticism and have been waiting for Beijing to back up its stimulus pledges with real money. Some have also become concerned that many stocks are already reaching overvalued levels.

The Hang Seng China Enterprises index, which includes Chinese shares traded in Hong Kong, rose more than 30 percent in the past month through Monday, making it the best performer among more than 90 global stock indexes tracked by Bloomberg.

The world’s second largest stock market has had several boom and bust cycles. Faced with slowing growth and disinflationary pressures, China went into stimulus mode in late 2014, triggering a spectacular stock market rally that spectacularly crashed to earth in mid-2015. Back then, the nation’s retailers ramped up leverage and they sent Shanghai. The Stock Exchange Composite Index doubled from October 2014 to June 2015. Then, the stock index fell more than 40% in two months.

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“We need fiscal reform and then hopefully major economic reform,” Eva Lee, head of Greater China equities at UBS Global Wealth Management, told Bloomberg Television. “By the end of this year, if we still don’t have any major measures, we’ll probably finish at this level.”

–With assistance from Tian Chen, John Cheng and Sangmi Cha.

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