China’s Stocks Rebound to Pare Worst Monthly Rout Since 2008

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China Markets: Is It Time to Jump In?
  • Shanghai Composite's RSI points to rebound for stocks
  • Citic Securities climbs after reporting 75% jump in earnings

China’s stocks rose for the first time in four days amid speculation the steepest monthly selloff since the global financial crisis was overdone, while the central bank injected more liquidity into the financial system to avert a cash crunch before next month’s holidays.

The Shanghai Composite Index rallied 3.1 percent to 2,737.60 at the close, trimming the January decline to 23 percent, the most since October 2008. Gains were led by industrial and financial companies. China Cosco Holdings Co. halted a three-day, 25 percent slide, while Citic Securities Co. led an advance for brokerages after reporting a surge in earnings. Hang Seng China Enterprises Index jumped 2.7 percent in Hong Kong as regional markets rose after the Bank of Japan adopted negative interest rates to boost the economy.

Technical indicators signaled the Shanghai measure is oversold, with the relative-strength index slumping below 30 over the past three days. The stocks gauge has fallen 47 percent since the June high, dragged down by a slowing economy, yuan volatility and concern about the government’s ability to manage both as capital outflows hit a record last year. The index trades at 10.9 times estimated 12-month earnings, compared with the seven-year average of 12.

“The selloff in January has been very violent and opened up this opportunity,” said Erwin Sanft, head of China strategy with Macquarie Capital Securities Ltd. in Hong Kong. “This is the best opportunity in seven years and at the start of 2009 we last had such cheap stocks.”

It’s been a wild ride for Chinese investors over the past 12 months. After cheerleading by state media helped fuel an unprecedented boom in mainland shares in the first half of last year, the market crashed over the summer as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a 25 percent rally in the Shanghai Composite through December, but those gains were wiped out this month as the index entered a bear market.

Strategists and technical analysts surveyed by Bloomberg this week are targeting a bottom of 2,500 for the Shanghai index. Declines below that level may trigger more forced equity-linked sales, according to UBS Group AG.

The CSI 300 Index advanced 3.2 percent on Friday. A measure tracking brokerages and banks jumped 3.2 percent after Citic Securitiesreported 2015 net income jumped 75 percent from the previous year. Citic and Haitong Securities Co., which estimated earnings doubled last year, surged more than 5 percent.

A gauge of industrial shares rose 3.6 percent, paring losses to 26 percent this month, the most among 10 sectors. China Railway Group Ltd. jumped 9.9 percent, while China Shipping Container Lines Co. rose for the first time in four days, gaining 10 percent. Industrial companies have slumped as the Baltic Dry Index, a measure of commodity shipping costs, slid to a 30-year low.

Oversold Market

“The market is oversold and bargain hunting could happen any time,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “The recent decline reflects extreme pessimism,” said Wu, who is keeping his stocks holdings unchanged at about 40 percent of allocations.

Hong Kong’s Hang Seng Index advanced for a third day, gaining 2.5 percent. Asian shares rallied and the yen reversed gains after Japan’s central bank unexpectedly adopted a negative interest rate. The move comes after the European Central Bank indicated it could boost stimulus as soon as March. Bets the Federal Reserve will hike rates again this quarter have dropped.

Easing Liquidity

To ease a cash crunch in the Chinese banking system in the build up to the Lunar New Year, the People’s Bank of China said it will conduct open-market operations every working day around the holiday, compared with the current twice-weekly practice. The seven-day repurchase rate, a gauge of funding availability in the financial system, dropped nine basis points to 2.22 percent in Shanghai, the lowest since Dec. 15.

The authority will conduct the operations daily between Jan. 29 and Feb. 19, except for the holiday on Feb. 7-13, according to a statement posted on its website Thursday. Policy makers are trying to avoid exacerbating an exodus of funds by refraining from cutting lenders’ reserve-requirement ratios, while at the same time keeping borrowing costs from rising amid the slowest growth in a quarter century.

— With assistance by Shidong Zhang

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