Photographer: Qilai Shen/Bloomberg

Onshore Chinese Stocks Burst Into Life as Demand Surges

Onshore Chinese stocks were quite subdued for much of this year’s party in equity markets, but they are really getting into the groove now.

Tailwinds are in place, including yuan strength, robust corporate results and next month’s Communist Party conference. The Shanghai Composite Index rose 11 percent from its May low through Tuesday, yet its year-to-date gain of 9 percent is less than half that of the Hang Seng China Enterprises Index, as well as the MSCI Asia Pacific Index. The Shanghai gauge was resilient Wednesday, closing little changed while the H share index and most other markets declined amid concern about North Korea.

Brokerages from Credit Suisse Group AG to Jefferies Group LLC say there’s more room for gains in mainland stocks, while Yinhua Fund Management Co.’s Zhou Keyan thinks this is only the start of a bull run that could last two or three years.

Here’s some evidence:

Foreign Demand:
In the week ended Sept. 1, foreign investors purchased net 15.4 billion yuan ($2.4 billion) of mainland shares through stock link programs between Hong Kong and China. That’s the most since August 2015, according to data compiled by Bloomberg.

Surging Turnover:
Average daily turnover on mainland exchanges last week was 590 billion yuan, climbing to 645 billion yuan Monday, the most since mid-April. There are signs of overbuying though, as the Shanghai Composite’s 14-day relative strength index hit 73 Tuesday, the highest since November.

Higher Premium:
In another sign of strong demand, dual-listed mainland shares are trading at about a 34 percent price premium over their Hong Kong counterparts, the most in 14 months, according to the Hang Seng China AH Premium Index.

There is an expectation that China’s policy makers will keep markets stable in the lead-up to the party congress on Oct. 18. A Credit Suisse report Tuesday said domestic liquidity conditions will likely stabilize ahead of the meeting, and that should also help boost onshore stocks.

Stronger Currency:
The yuan has rallied 3.5 percent against the dollar this quarter, making it comfortably the best performing major currency in Asia. That strength has reduced demand for domestic investors to diversify their assets overseas, said Ken Wong, a Hong Kong-based fund manager with Eastspring Investments. Money is also pouring into onshore equities due to a lack of attractive alternatives, he said.

Margin Growth:
The outstanding balance of margin trading reached 948.7 billion yuan Monday, the highest this year, as investors have been taking on more leverage to bet on further gains. The figure is up 11 percent from a June 2 low, but remains 58 percent below its 2015 peak amid the stock market bubble.

— With assistance by Kana Nishizawa, and Amanda Wang

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