Chinese stocks just recorded the largest gain in years — but they were still hammered in June

Michael Smith / Newsmakers
  • Chinese stocks rebounded strongly on Friday. The benchmark Shanghai Composite recorded its largest daily increase since August 2016.
  • Despite the late bout of buying, the index fell 8% in June, its largest decline since January 2016.
  • The Chinese yuan also strengthened after hitting a fresh year-to-date low earlier in the session.

It’s been a tumultuous week for Chinese financial markets.

Stocks entered a bear market, dropping 20% from their January highs, while the Chinese yuan tumbled to the lowest level since November last year.

However, both have found a pulse in late trade on Friday.

Stocks, in particular, enjoyed a large and somewhat miraculous bid on the final trading day of the quarter.

Here’s the final scoreboard.

Shanghai Composite 2,848.31 , 2.20%
SSE50 2,480.72 , 2.29%
Shenzhen Composite 1,606.72 , 3.21%
CSI300 3,511.48 , 2.57%
CSI500 5,218.09 , 3.22%
Hang Seng 28,938.49 , 1.48%
USD/CNY 6.5973 , -0.09%
USD/CNH 6.6250 , -0.12%

Big gains.

After falling 22.4% from late January, the benchmark Shanghai Composite Index closed up 2.2% at 2,848.31, its largest gain since August 2016.

All sectors finished firmly in the black, led by gains in healthcare, technology, consumer staples and telecoms which all rose more than 2.5%.

The strong gains followed an announcement from China’s National Development and Reform Commission (NDRC) on Thursday that it will ease foreign investment restrictions in a number sectors ranging from agriculture to banking, a move seen by some as an attempt to appease mounting trade tensions between China and the United States.

The new rules are due to take effect on July 28.

While that was cited as the catalyst behind the rally, not everyone was convinced.

“Whenever the Chinese say, ‘We’re creating more space in our market for you to operate in,’ there is still a long list of things you are not allowed to do,” Derek Scissors, a China analyst at the American Enterprise Institute, told CNBC.

“The Chinese simply don’t permit competition with a large range of their firms. They have a set of state-owned businesses they don’t allow to go out of business.”

While the rally could reflect that stocks have been pummeled this week, leading to short-covering from some investors as stocks ripped higher on the announcement, such was the scale of the move, one suspects that government support may have also been a factor.

Only this week, China’s National Institution for Finance and Development (NIFD), a Chinese government-backed think tank, warned that “financial panic” was likely to escalate in China in the period ahead, adding that “preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.”

“China’s State Council should be ready to implement any market support measures in coordination with the central bank and other regulators, key government ministries, and the police,” the group said.

Despite the solid end to the month, the Shanghai Composite still lost 8% in June, the largest decline since January 2016.

Shanghai Composite Daily Chart

All other mainland indices, and the Hang Seng in Hong Kong, also rallied hard on Friday.

Perhaps adding to optimism among stock investors, the Chinese yuan, after falling to fresh year-to-date lows earlier in the session, reversed course midway through the session, mirroring a sharp move higher in the euro.

“The catalyst was a positive conclusion to the European Union (EU) summit which pushed the euro higher,” said Elias Haddad, Senior Currency Strategist at the Commonwealth Bank.

“European Union (EU) member states agreed on a package of measures to deal with the flow of migrants.

“The agreement defuses intra EU political tensions and will likely help German Chancellor Angela Merkel avoid a revolt within her coalition government.”

The euro move helped the USD/CNH reverse earlier gains, seeing it fall from a high of 6.6521 to as low as 6.6167.

It currently trade at 6.6276.

USD/CNH Daily Chart

Despite the modest turnaround, the USD/CNH has already gained 3.4% this month, putting the greenback on track to record its largest gain against the offshore-traded yuan since August 2015.

On Friday, the People’s Bank of China (PBoC) set the USD/CNY higher for an eight consecutive session.

On Saturday, China will release manufacturing and non-manufacturing PMI figures for June. According to an economy-tracker developed by Macquarie Bank, the manufacturing PMI could be stronger than what many are expecting.