Chinese Stocks Surge Most Since 2008 for World’s Biggest Rally

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What Is Behind the Optimism in Chinese Stocks?

Chinese stocks rallied, with the Shanghai Composite Index completing its biggest six-day advance since November 2008, on optimism government plans to boost foreign access to the nation’s markets will spur inflows.

Technology and consumer stocks led gains. More than 250 stocks rose by the 10 percent daily limit on the Shenzhen Composite Index -- the smaller of China’s two exchanges that has doubled this year and trades at 71 times reported earnings. China Shipbuilding Industry Co. and Avic Helicopter Co. paced gains by defense shares after the government published a white paper on military strategy that unveiled a greater naval role.

The Shanghai Composite rose 2 percent to 4,910.90 at the close, taking its six-day rally to 15 percent, the most among major global benchmark indexes tracked by Bloomberg. The Shenzhen Composite climbed 3.6 percent. The government announced Friday that cross-border sales of funds will begin July 1, widening access to financial markets and capital in the world’s second-largest economy. A stock exchange link between Shenzhen and Hong Kong is due to start this year.

“Buying momentum is strong, backed by increasing trading volumes,” said Jimmy Zuo, a Shenzhen-based trader at Guosen Securities Co. “We do expect some hiccups ahead though as the Shanghai index approaches the 5,000 mark.”

Turnover on the Shanghai exchange jumped to $174 billion on Monday, the second highest on record, while trading volumes were 25 percent above the 30-day average on Tuesday. Hong Kong’s Hang Seng China Enterprises Index increased 2.6 percent, while the Hang Seng Index added 0.9 percent. Hong Kong’s markets were closed Monday for a holiday. The CSI 300 Index, which surpassed the 5,000 level Monday, increased 1.9 percent.

Investment Quota

The Shanghai Composite has surged 142 percent over the past year, after the central bank cut interest rates three times since November to support the economy, margin trading jumped to a record and an exchange link between Shanghai and Hong Kong started.

Gauges of technology and consumer-discretionary shares in the CSI 300 gained at least 3.6 percent for the biggest advance among 10 industry groups. Sanan Optoelectronics Co. and Suning Commerce Group Co. both jumped 10 percent.

Avic Aircraft Co. rallied by the daily limit in Shenzhen. The People’s Liberation Army will add “open seas protection” to “offshore waters defense” on a list of core naval missions, according to the country’s 2015 defense white paper. China must expand on its “active defense strategy” to meet the demands of a new historical era.

Mutual Funds

China and Hong Kong approved cross-border sales from July 1 in a move that will widen access to financial markets and capital in the world’s second-largest economy. The initial quota will be a total 600 billion yuan ($97 billion), split evenly in each direction.

“Most people expect the Hong Kong market to benefit from the mutual fund recognition and go up,” said Yen Chiu, a Hong Kong-based trader at Shenwan Hongyuan Group. “There’s a great catch-up rally after A shares jumped yesterday.”

The aggregate investment quota for the Shanghai-Hong Kong link will be abolished when a similar equity link starts with the Shenzhen bourse, Ming Pao reported Tuesday, citing unidentified people. The daily quota limit will be increased, the Hong Kong newspaper reported. Hong Kong Exchanges & Clearing Ltd. is preparing for the Shenzhen program to begin in the second half of 2015, while the date may be announced by the end of June, Chairman Chow Chung Kong said last month.

Margin traders increased holdings of shares purchased with borrowed money, with the outstanding balance of margin debt in Shanghai climbing to 1.32 trillion yuan to approach a record high set on May 21.

The China Securities Regulatory Commission gave written approvals for initial public offerings to 23 companies, the regulator said in a statement on its microblog on Friday. Five companies including China National Nuclear Corp. will be listed on the Shanghai stock exchange, while 18 will do so in the Shenzhen bourse, it said.

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