China Stocks Most Overbought Since Bubble Peak as Rally Reverses

Updated on
  • Shanghai gauge crosses level seen signaling turnaround
  • Shares running into greater resistance, strategist says

Chinese stocks retreated from a three-month high, with materials and energy companies leading the drop, amid signs that recent gains by the market were excessive.

The Shanghai Composite Index fell 0.2 percent, halting a three-day advance, after trade data signaled sluggish consumer demand in the world’s second-largest economy. Jiangxi Copper Co. paced metal shares lower after rising to this year’s highest level. The mainland benchmark gauge’s 14-day relative-strength index surpassed 70 on Wednesday for the first time since just before last summer’s $5 trillion rout.

Official data released Wednesday showed a bigger-than-expected decline in imports, which suggests that domestic demand is still weak, according to Australia & New Zealand Banking Group Ltd. China is set to report second-quarter gross domestic product data Friday, with economists predicting an expansion of 6.6 percent, which would be the slowest since 2009.

“As it edges up, the market is running into greater and greater resistance,” said Shen Zhengyang, a strategist at Northeast Securities Co. in Shanghai. “China is unlikely to further boost money supply even if global central banks start a new round of easing, while the Chinese economy is not improving in the near term.”

The Shanghai Composite, which closed at 3,054.02, has risen 5.6 percent since June 23, when the U.K. voted to leave the European Union, placing the gauge among the top 5 gainers among 94 global benchmarks tracked by Bloomberg. The Hang Seng China Enterprises Index and the Hang Seng Index climbed 1.1 percent in Hong Kong.

Jiangxi Copper and and China Molybdenum Co. fell at least 2.3 percent on the mainland. Sinopec Oilfield Service Corp. sank 2.8 percent after saying Tuesday that expects a wider net loss for the first half. Shaanxi Coal Industry Co. dropped 2.3 percent.

A lack of capital inflows is spurring investors to move between the A-share market’s sectors, said Shen of Northeast Securities. "Money is rotating out of energy and material stocks, which have had decent rallies, into new-economy growth companies," he said.

(A previous version of this story corrected the Shanghai Composite’s direction.)
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