Chinese stocks and the yuan rose on the local market in the first session after the holiday, with sentiment boosted by Beijing's supportive policy and signs of a continued recovery in consumption.
The CSI 300 index rose as much as 1.8% on its first trading day of May, led by the information technology and consumer staples sectors. The index was the best performer in Asia. The MSCI Asia Pacific Index rose 0.3%.
The rally follows gains in other markets when mainland markets were closed for holidays from Wednesday to Friday. China’s Nasdaq Golden Dragon jumped 8.5% during that period, while the Hang Seng Index of Chinese stocks rose 4.4% over the two days to Friday.
On the currency front, the yuan's price in transactions within the Chinese mainland followed the advance witnessed by the currency's price in foreign transactions, after recording the best week this year with the decline of the dollar.
“Overseas markets, including Hong Kong, were strong last week, so this is probably a catch-up rally,” said Shen Yau Ng, investment manager at Aberdeen (abrdn). “Travel data from the holiday also looks good.”
China’s battered assets are getting a second chance as a combination of rebounding earnings, policy support and cheap valuations lure investors in. The latest catalyst came from a Politburo meeting just before the holiday, when top Chinese leaders pledged to explore new measures to address a long-running housing crisis and hinted at possible interest rate cuts in the future.
Increase in external flows
“The important meeting held before the holiday made clear the goal of continuing to deepen reforms and expand opening-up, which will help drive the mainland stock market higher in the near term,” said Shen Ming, director at Chanson & Co. “The trend of holiday consumption has also raised expectations for a recovery in consumption.”
Foreign money is also returning to Chinese and Hong Kong stocks, though whether this represents a tactical rebound or a more sustained reclassification remains to be seen. Bank of America Securities said the worst of the outflows is over, while UBS Group strategists said earnings on mainland-listed stocks are likely to hit a record low in the first quarter.
Overseas funds boosted holdings of mainland stocks for a third straight month in April, their longest buying streak in a year. The rally in Hong Kong stocks over the May Day holiday, when Chinese investors were on holiday, points to strong appetite from overseas funds.
For the recovery to continue, investors will be looking for solid evidence of a consumption rebound in holiday data. Chinese tourists headed abroad for the extended May Day holiday in May at roughly pre-pandemic levels, according to data provider ForwardKeys. The number of Chinese tourists to Hong Kong jumped more than 20% during the holiday.
“We need the May holiday consumption data to meet expectations to sustain the rally,” said Zikai Chen, head of Asian and global emerging markets equities at BNP Paribas Asset Management Asia. “Otherwise it will lead to another round of questions about whether consumers are pulling back on spending and whether they are becoming more cautious.”
