Chinese Stocks Rally As Beijing Goes All-In On Financial Support, Squeezes Short Sellers

Chinese equities recorded their most robust performance on Wednesday in several months, buoyed by Beijing’s commitment to inject financial stimulus into the weakened economy and implement regulations designed to restrict short selling of the nation’s entities.

This uptick follows rumors that emerged on Tuesday about the government’s plans to deploy approximately 2 trillion yuan ($279 billion), largely sourced from state enterprises’ offshore accounts, with the aim of bolstering equity purchases via a stock connect link.

What Happened: Bold Moves to Stimulate the Economy

The People’s Bank of China (PBOC) announced a reduction in the reserve requirement ratio (RRR) for all banks by 50 basis points, bringing it down to 10% effective Feb. 5. This move is expected to inject up to one trillion yuan ($139.45 billion) into the market, marking the lowest RRR level since March 2007. This strategic decision aligns with the PBOC’s ongoing efforts to bolster the economic recovery amid declining stock markets.

Additionally, the China Securities Regulatory Commission (CSRC) has reportedly been in talks with several hedge fund managers, pressing them to limit short selling in the stock index futures market. According to Reuters, short interest on U.S.-listed Chinese stocks and Hong Kong stocks has seen a sharp decline, dropping 15% in the 30 days leading up to Jan. 22, as per data from S3 partners.

Hong Kong shares of Alibaba Group Holdings Ltd. BABA saw a remarkable increase of 7.9% on Tuesday, reaching their highest level since Jan. 4. This surge followed reports of substantial share purchases by co-founder Jack Ma and Chairman Joe Tsai in the fourth quarter. Consequently, the company’s U.S.-listed shares experienced a near 8% jump on Tuesday.

Why It Matters: A Market In Recovery Might Be In Sight

The Chinese stock market has experienced a substantial decline, losing about a third of its value in the past year. Currently, it stands as one of the most undervalued markets globally, based on traditional valuation metrics. The forward price-to-earnings ratio for the iShares MSCI Hong Kong Index Fund EWH is now at 11x, significantly lower than its historical average.

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Kiyong Seong, Societe Generale’s lead Asia macro strategist, acknowledges the unexpected scale of the 50 bp cut but suggests a cautious approach, waiting for a comprehensive set of policy supports to assess their overall market impact. Ihor Dusaniwsky, managing director of predictive analytics at S3, points out a trend of continued short covering, hinting at a potential short-term recovery in Chinese markets.

Market Reactions: Chinese Stocks Soar

Following these announcements, the Hong Kong Hang Seng Index, a gauge for offshore Chinese stocks, rallied as much as 3.6% on Wednesday, adding to a 2.6% surge on Tuesday.

This marks the strongest 2-day performance since November 2022. The domestic Chinese shares, as indicated by the CSI 300 Index, also witnessed a rise of 1.4%.

Chart: Hong Kong Index Marks Strongest 2-Day Rally Since November 2022

In premarket trading on Wednesday, the Franklin FTSE Hong Kong ETF FLHK showed an 8.2% increase, while the iShares MSCI Hong Kong Index Fund and the iShares China Large-Cap ETF FXI rose by 2.5% and 3.8% respectively.

Shares of Alibaba Group Holdings Ltd. saw a 2% increase. Similarly, Baidu Inc. BIDU shares were up by 2.8%, following a 7.5% gain the previous day.

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