Chinese stocks capped their biggest two-day gain in three weeks, led by energy and power companies, as funds flowed back to the equities market after a flood of new share offerings.
Huadian Power International Corp. and Huaneng Power International Inc. jumped by the daily limit of 10 percent, sending a gauge of utilities to the biggest gain among industry groups. PetroChina Co. rallied 2.9 percent after Caixin cited its president as saying the company’s first-half profit was better than expected. China Petroleum & Chemical Corp., the biggest Asian refiner, rose to a one-month high in Hong Kong after Macquarie Group upgraded the stock to outperform.
The Shanghai Composite Index rallied 2.5 percent to 4,690.15 at the close, extending Tuesday’s 2.2 percent jump. The gauge plunged 13 percent last week, the worst weekly loss since the 2008 global financial crisis. Funds started returning to the stock market after an estimated 6.7 trillion yuan ($1.08 trillion) of liquidity was locked up due to initial public offerings last week.
“The expectation was for the market to rebound as there is a substantial amount of money locked up that it is going to be released today,” said Gerry Alfonso, a director at Shenwan Hongyuan Group Co. in Shanghai.
The CSI 300 Index advanced 2 percent. Hong Kong’s Hang Seng China Enterprises Index added 0.6 percent, while the Hang Seng Index increased 0.3 percent. The MSCI China Index climbed 0.7 percent, rising for a third day in the longest stretch of gains in two months.
Trading volumes in Shanghai were 7.7 percent below the 30-day average for this time of day. Net selling of Shanghai stocks via the exchange link with Hong Kong reached more than 3.04 billion yuan, the highest northbound net sales since May 28, according to data compiled by Bloomberg.
The Shanghai gauge has surged 131 percent in the past year on a record jump in margin debt and bets the government will lower borrowing costs. The measure is valued at 17.3 times 12-month projected earnings, down from a five-year high of 19.5 set earlier this month, according to data compiled by Bloomberg.
A gauge of utilities in the CSI 300 jumped 5.1 percent, the biggest gain among 10 industry groups, as GD Power Development Co. rallied 8.7 percent. Aviate Global LLP said in a June 22 report that power sector will be top area for reform especially electricity prices.
A measure of energy companies surged 4.8 percent. PetroChina jumped 2.9 percent. The company’s first-half profit will reach 40 billion yuan, Caixin cited president Wang Dongjin as saying on the sidelines of its shareholder meeting. Sinopec Shanghai Petrochemical Co. soared 10 percent. Sinopec advanced 0.7 percent to HK$6.83 in Hong Kong. Macquarie boosted its share-price forecast to HK$7.50, citing stronger-than-expected petrochemical margins and an improved outlook for 2016.
Bullish wagers on the China 50 ETF have increased to the most expensive level versus bearish ones since the contracts’ debut in February marked the start of equity-linked options trading in China. Options traders are doubling down on bets that monetary stimulus and reforms by state-owned companies will keep the rally intact, undeterred by strategists who say China’s equity market is a bubble poised to burst.
“Investors are using call options to make sure they won’t miss the boat should the market rebound strongly,” Li Jingyuan, general manager of the securities investment department at Shanghai Zhaoyi Asset Management, said by phone on Tuesday. “Their belief in the foundations of the bull market, such as government reforms and loose monetary policies, isn’t shaken.”
Margin traders decreased holdings of shares purchased with borrowed money for a second day on Tuesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange extending its retreat to 1.47 trillion yuan.
The decline in margin trading, in which investors borrow money to buy securities, comes as pressure grows on regulators to take measures to avoid a stock market crash. This month, the China Securities Regulatory Commission said brokerages’ margin lending should be capped at four times their net capital, while strategists at Credit Suisse Group AG and Bank of America Corp. issued bubble warnings.
Certain parts of the Chinese stock market have seen valuations extending to unsustainable levels, especially some small-cap companies, Helen Zhu, BlackRock Inc’s head of Chinese equities, said in a briefing in Hong Kong on Wednesday.